Diluted EPS calculation common, entire, correct, 420, net

rosemary2011

Lawson, Inc.’s net income for the year was $1,060,000 with 420,000 shares outstanding. Lawson has 2,000 shares of 8%, $1,000 par value convertible preferred stock that were outstanding the entire year. Each share of preferred is convertible into 50 shares of common stock. Lawson's diluted earnings per share are closest to:

A) $1.94.

B) $2.04.

C) $2.14.


Your answer: C was incorrect. The correct answer was B) $2.04.

Lawson’s basic EPS ((net income – preferred dividends) / weighted average common shares outstanding) is ($1,060,000 – (2,000

pacmandefense

hi andrew,

yes, you add them back, but after you have deducted them.

convertible preferred, are regular preferred afterall (hence the deduction) with the feature that they are convertible (add back).

and that they are not treated the same, you can clearly see in the calcs that you posted above.

cheers

ramdabom

Net income is always before any dividends (common or preferred) are paid out. The only thing that results in an addback to net income is convertibel bonds that are dilutive, where you add back th after-tax cost oof the interest on the debt that was deucted in arriving at net income.

dmar

Thanks Guys!

Much appreciated.