On January 1, 2013, Belk, Inc. had outstanding 440,000 common shares (par $1) that originally sold for $20 per share, and 4,000 shares of 10% cumulative preferred stock (par $100), convertible into 40,000 common shares. On October 1, 2013, Belk issued an additional 16,000 shares of common stock at $33. At December 31, 2013, there were common stock options outstanding, issued in 2012, and exercisable for 20,000 shares of common stock at an exercise price of $30. The market price of the common stock at year-end was $48. During the year the price of the common shares had averaged $40. Net Income was $650,000. The tax rate for the year was 40%. Compute basic and diluted EPS for the year ended December 31, 2013.
Answer : EPS for the year ended December 31, 2013.is
Basic EPS = ($650,000 – $40,000) ÷ 444,000 = $1.37
Diluted EPS = ($650,000 – $40,000 + $40,000) ÷ (444,000 + 5,000 + 40,000) = $1.33
Working Notes for the above answer is as follow
We have provided with the followinginformation of Belk, Inc.
Outstanding 440,000 common shares (par $1) that originally sold for $20 per share,
4,000 shares of 10% cumulative preferred stock (par $100), convertible into 40,000 common shares.
On October 1, 2013,isued additional 16,000 shares of common stock at $33.
At December 31, 2013, common stock options outstanding, issued in 2012, and
exercisable for 20,000 shares of common stock at an exercise price of $30.
The market price of the common stock at $48.
During the year the price of the common shares had averaged $40.
Net Income was $650,000.
The tax rate for the year was 40%.
Now we will calculate EPS as follow
Numerator (Basic EPS): Net income = $650,000; Preferred dividends =
$40,000 [(10% x $100) x 4,000]. Because the preferred stock is cumulative, dividends are included whether or not paid.
Denominator (Basic EPS): Weighted average # shares common stock outstanding
1/1 – 12/31 440,000 x (12/12) = 440,000
10/1 – 12/31 16,000 x (3/12) = 4,000
Weighted average # shares 444,000
Basic EPS = ($650,000 – $40,000) ÷ 444,000 = $1.37
2. Assume exercise at the later of the date of issue (2012) or the beginning of the period (1/1/13). Assume exercise 1/1/13
Proceeds received on exercise = 20,000 x $30 = $600,000
Shares repurchased = $600,000 ÷ $40 = 15,000
Net increase in # shares outstanding = 5,000 (20,000 – 15,000)
EPS with the inclusion of the options:
($650,000 – $40,000) ÷ (444,000 + 5,000) = $1.36 (this will be used to test for dilutive effect of convertible preferred stock).
Convertible Preferred Stock: Use the If Converted Method
1. Assume conversion at later of date of issue (?) or beginning of year (1/1/13). Assume conversion on 1/1/13.
2. Dividends not paid = $40,000 [(10% x $100) x 4,000]
3. # additional shares on conversion = 40,000
4. Conversion ratio = $40,000 ÷ 40,000 = $1.00
5. Dilutive because $1.00 is less than $1.36.
Basic EPS = ($650,000 – $40,000) ÷ 444,000 = $1.37
Diluted EPS = ($650,000 – $40,000 + $40,000) ÷ (444,000 + 5,000 + 40,000) = $1.33
