You have been provided with the following information for Company 123 for the year 2020: Net income $ 4,800,000 Number of common shares outstanding 1,200,000 shares 10%, cumulative preferred shares, convertible into 120,000 common shares $ 1,800,000 8% convertible bonds; convertible into 100,000 common shares $ 9,500,000 360,000 call options exercisable at $ 26 per share Additional information 1. The common and preferred shares and the convertible bonds were outstanding from the beginning of the year. 2. In 2020, a $ 1, 500,000 dividend was declared and distributed; however, no dividends were declared in 2019. 3. The average market price of the common shares in 2020 was $ 0. The stock price was $ 27 on January 1, 2020, and $ 5 on December 31, 2020. 4. The convertible bonds were sold at par. 5. The income tax rate for 2020 is 40%. Required: a) Calculate basic earnings per share b) Calculate diluted earnings per share c) Why is earnings per share useful? What is the additional importance of reporting diluted earnings per share?
You have been provided with the following information for Company 123 for the year 2020:
Net income $ 4,800,000
Number of common shares outstanding 1,200,000 shares
10%, cumulative
8% convertible bonds; convertible into 100,000 common shares $ 9,500,000
360,000 call options exercisable at $ 26 per share
Additional information
1. The common and preferred shares and the convertible bonds were outstanding from the
beginning of the year.
2. In 2020, a $ 1, 500,000 dividend was declared and distributed; however, no dividends were
declared in 2019.
3. The average market price of the common shares in 2020 was $ 0. The stock price was $ 27
on January 1, 2020, and $ 5 on December 31, 2020.
4. The convertible bonds were sold at par.
5. The income tax rate for 2020 is 40%.
Required:
a) Calculate basic earnings per share
b) Calculate diluted earnings per share
c) Why is earnings per share useful? What is the additional importance of reporting
diluted earnings per share?
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