Diluted EPS (with convertible preferred shares and options question) stock

EastCoastJ

During 2009, a company had outstanding 20,000 shares of common stock and 50,000 shares of preferred stock convertible into 150,000 shares of common stock. It also had 100,000 stock options outstanding, each of which allows the holder to acquire one share of common stock for $10. During 2009 there were dividends paid of $0.50 per share on common stock and $3.50 per share of preferred stock. The net income for 2009 was $450,000 and the income tax rate was 35%. Avg market price for the common stock for the year was $25.

I can't seem to get this question right... please calculate: basic and diluted EPS for this and state whether the conv. pref shares or the options are dilutive/anti-dilutive.

Thank you so much for your help!!!

trogulj

the diluted EPS is supposed to be $1.06... but i keep getting $1.10.

the answer says the conv. pref stock is NOT dilutive but i think it is?

$3.50 * 50,000 / 150,000 = 1.17 which is less than the basic EPS of $1.38

Maddin

1) Calculate basic: Since no additional common was issued, you dont need to calculate WACSO. So that simplifies it.

Basic: (450,000 - ($3.50 x 50000) ) / (20,000) = $13.75 on per share basis for common

2) Rank the complex securities by most dilutive to least, if they are potentially dilutive

Note : If the avg mkt price is greater than the XP, meaning "its in the money", it will ALWAYS be DILUTIVE. If it's out of the money, simply ignore it. And please ignore div on common shares

These options are in the money!

To calculate incremental shares use this formula:

(avg mkt price-xp)/(avg mkt price) x # of options

(25-10)/25 * 100,000 = 60,000 additional/incremental shares that you include in the denom

P/S : Quick check to see if it's dilutive : P/S div/incremental shares on pref if converted. If its lower than basic, as noted in step 1 then its dilutive

(3.50 x 50000) / 150,000 = $1.16< 13.75 ----->DILUTIVE.. Drop the 150,000 in the denom

So heres dilutive EPS

(450,000 - 175,000+175,000)/ (20,000+150,000+60,000) = $1.96

Basic EPS : $13.75
Dilutive EPS: $1.96


The basic seems high but I believe the calculation with the numbers you provided are correct. What are you showing?

JGovender

i'm sorry there was a typo in my original post-- the common shares outstanding is 200,000. Not 20,000! I'm not sure how to go about editing the original post. Sorry!