Firm that earned $20,000 (after tax)had the following securities outstanding all year during which the tax rate was 40%: 20,000 common shares
1,000, 6%, $100 par cumulative nonconvertible preferred shares
2,000, 4%, $50 par cumulative preferred shares, each share convertible into 5 common shares
100, 8%, $1,000 convertible bonds, each convertible into 10 common shares (bonds were issued at face)
What is basic EPS? (Rounded to the nearest cent)

Question

Quizplus · Accepted Answer

Basic EPS is calculated as (Net Income - Preferred Dividends) / Weighted Average Common Shares. Preferred dividends are $6,000 (1,000 shares * $100 * 6%) + $4,000 (2,000 shares * $50 * 4%) = $10,000. Net income after preferred dividends is $20,000 - $10,000 = $10,000. Basic EPS = $10,000 / 20,000 shares = $0.50.

Firm That Earned $20,000 (After Tax)had the Following Securities Outstanding