Pr. 16-130 modified by tg—
3. Earnings per share (60 points).
Net income for Adcock Corp. was $500,000 for 2007. Its tax rate was 40%.
On January 1, 2007 there were 200,000 shares of common stock outstanding. On April 1, 20,000 shares were issued. On July 31, 2007 Adcock issued a 2-for-1 stock split effected in the form of a stock dividend. On September 1, Adcock bought 30,000 shares of treasury stock for $45 per share.
There are 30,000 options to buy common stock at $40 a share outstanding. The market price of the common stock averaged $50 during 2007 (both market price and option price have already been adjusted for the stock split).
During 2007, there were 40,000 shares of convertible preferred stock outstanding. The preferred is $100 par, pays $3.50 a year dividend, and is convertible into six shares of common stock after the stock split.
Adcock issued $2,000,000 of 8% convertible bonds at face value during 2006. Each $1,000 bond is convertible into 30 shares of common stock after the stock split.
Instructions
(a) Compute the weighted average number of common shares outstanding.
| Dates | Outstanding | Adjustment | Months | Weighted |
| Transactions in Common Shares | Cumulative | Adjustment | Months | Weighted |
| Jan 1 to Mar 31 | 200,000 | 2.00 | 3 | 1,200,000 |
| Apr. 1, 2007, sold shares | 20,000 | |||
| Apr. 1, 2007 to July 30 | 220,000 | 2.00 | 4 | 1,760,000 |
| Jul 31, 2007, 100% stock dividend | 220,000 | |||
| Aug 1 to Aug 31 | 440,000 | 1.00 | 1 | 440,000 |
| Sept 1, 2007 acquired treasury shares | -30,000 | |||
| Oct. 1, 2007 – Dec 31 | 410,000 | 1.00 | 4 | 1,640,000 |
| 12 | 5,040,000 | |||
| Weighted average shares | 420,000 | |||
| Potentially dilutive securities | ||||
| 8% cumulative convertible preferred | 5,000 | shares | Options | |
| 8% | $ 100.00 | par | 100,000 | |
| conversion ratio | 12 | Price | $ 22.00 | |
| Mkt | $ 50.00 | |||
| Dividend | $ 40,000 | = | short-cut mtd: | |
| Shares converted into | 60,000 | $ 0.67 | 56,000 | |
| Proceeds | 2,200,000 | |||
| Treasury stock method | Buy back | 44,000 | ||
| Net new | 56,000 | |||
| Bonds | 8,000,000 | face | ||
| 7% | interest rate | |||
| Face value of each bond | 5,000 | 40% | tax rate | |
| Number of bonds | 1,600 | interest expense | ||
| Conversion ratio | 120 | 560,000 | ||
| 336,000 | after tax | |||
| After tax interest | $ 336,000 | = | ||
| bonds convert to shares | 192,000 | $ 1.75 | ||
| Numerator | Denominator | EPS | ||
| Net income | 3,800,000 | |||
| Preferred dividend | -40,000 | |||
| 3,760,000 | 1,050,000 | $ 3.58 | ||
| Options | 56,000 | |||
| 3,760,000 | 1,106,000 | $ 3.40 | ||
| Preferred stock | 40,000 | 60,000 | ||
| 3,800,000 | 1,166,000 | $ 3.26 | ||
| Convertible bonds | 336,000 | 192,000 | ||
| 4,136,000 | 1,358,000 | $ 3.05 | ||
