Information relating to the capital structure of Parke Corporation is as follows:
` December 31
2008 2009
Outstanding shares of:
Common stock 90,000 90,000
Preferred stock, convertible into 30,000 shares of common 30,000 30,000
10% convertible bonds, convertible into 20,000 shares
Of common $1,000,000 $1,000,000
During 2009 Parke paid $45,000 dividends on the preferred stock, which is considered a common stock equivalent. The convertible bonds are not considered common stock equivalents. Parke’s net income for 2009 was $980,000 and the income tax rate was 40%.
10. For the year ended December 31, 2009, the primary earnings per share is:
a. $10.89
b. $10.39
c. $8.17
d. $7.79
11. For the year ended December 31, 2009, the fully diluted earnings per share is:
a. $9.82
b. $8.29
c. $7.71
d. $7.43
11: D
To calculate the primary earnings per share for the year ended December 31, 2009, we need to determine the weighted average number of common shares outstanding.
Step 1: Calculate the weighted average number of common shares outstanding.
The outstanding shares of common stock remained the same for both years, so the weighted average number of common shares outstanding is still 90,000 shares.
Step 2: Calculate the basic earnings per share.
Basic earnings per share is calculated by dividing the net income by the weighted average number of common shares outstanding.
Basic earnings per share = Net income / Weighted average number of common shares outstanding
Basic earnings per share = $980,000 / 90,000 shares
Basic earnings per share = $10.89
Therefore, the primary earnings per share for the year ended December 31, 2009 is $10.89. The correct answer is (a) $10.89.
To calculate the fully diluted earnings per share, we need to consider the impact of the convertible preferred stock.
Step 3: Adjust for the convertible preferred stock.
Since the preferred stock is convertible into common shares, we need to add the conversion to the weighted average number of common shares outstanding.
The preferred stock is convertible into 30,000 shares of common stock, so we add this to the weighted average number of common shares outstanding.
Adjusted weighted average number of common shares outstanding = Weighted average number of common shares outstanding + Conversion of preferred stock
Adjusted weighted average number of common shares outstanding = 90,000 shares + 30,000 shares
Adjusted weighted average number of common shares outstanding = 120,000 shares
Step 4: Calculate the fully diluted earnings per share.
Fully diluted earnings per share is calculated by dividing the net income by the adjusted weighted average number of common shares outstanding.
Fully diluted earnings per share = Net income / Adjusted weighted average number of common shares outstanding
Fully diluted earnings per share = $980,000 / 120,000 shares
Fully diluted earnings per share = $8.17
Therefore, the fully diluted earnings per share for the year ended December 31, 2009 is $8.17. The correct answer is (c) $8.17.
To calculate the primary earnings per share (EPS) and fully diluted EPS for the year ended December 31, 2009, we need to consider the outstanding shares of common stock and the impact of preferred stock dividends.
The primary EPS formula is:
Primary EPS = (Net Income - Preferred Stock Dividends) / Weighted Average Outstanding Shares of Common Stock
1. Calculate Weighted Average Outstanding Shares of Common Stock:
The number of outstanding shares remains the same throughout the year, so the weighted average is equal to the number of outstanding shares. Therefore, the weighted average outstanding shares of common stock for 2009 is 90,000.
2. Calculate Preferred Stock Dividends:
In 2009, Parke paid $45,000 dividends on the preferred stock. This amount needs to be subtracted from the net income in the EPS calculation.
3. Calculate Net Income:
The net income for 2009 is given as $980,000.
Now, we can calculate the primary EPS:
Primary EPS = (Net Income - Preferred Stock Dividends) / Weighted Average Outstanding Shares of Common Stock
Primary EPS = ($980,000 - $45,000) / 90,000
Primary EPS = $935,000 / 90,000
Primary EPS = $10.39
Therefore, the answer for question 10 is b. $10.39 (primary earnings per share).
To calculate the fully diluted EPS, we need to consider the impact of convertible securities, which in this case, are the 10% convertible bonds.
4. Calculate the impact of convertible bonds on diluted EPS:
The 10% convertible bonds are convertible into 20,000 shares of common stock. To consider the effect of their potential conversion into common stock, we need to calculate the incremental shares that would be issued upon their conversion.
Incremental Shares = Convertible Bonds / Conversion Ratio
Incremental Shares = 20,000 / 20,000
Incremental Shares = 1
Now, add the incremental shares to the weighted average outstanding shares of common stock to calculate the diluted shares:
Diluted Shares = Weighted Average Outstanding Shares of Common Stock + Incremental Shares
Diluted Shares = 90,000 + 1
Diluted Shares = 90,001
5. Calculate the fully diluted EPS:
Fully Diluted EPS = (Net Income - Preferred Stock Dividends) / Diluted Shares
Fully Diluted EPS = ($980,000 - $45,000) / 90,001
Fully Diluted EPS = $935,000 / 90,001
Fully Diluted EPS = $10.389
Therefore, the answer for question 11 is a. $10.389 (fully diluted earnings per share).