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 divided by the weighted average number of common shares outstanding. The weighted average number of common shares outstanding is calculated by taking the number of common shares outstanding at the beginning of the year and adding to it the number of common shares that would have been issued if all convertible securities had been converted at the beginning of the year. In this case, the number of common shares that would have been issued if all convertible securities had been converted at the beginning of the year is 2,000 * 5 + 100 * 10 = 12,000 shares. Therefore, the weighted average number of common shares outstanding is 20,000 + 12,000 = 32,000 shares. Basic EPS is therefore $20,000 / 32,000 = $0.50.

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