Homework SourseProblem 165 Amy Dyken controller at Splish Pharmaceutical In
Problem 16-5
Amy Dyken, controller at Splish Pharmaceutical Industries, a public company, is currently preparing the calculation for basic and diluted earnings per share and the related disclosure for Splish’s financial statements. Below is selected financial information for the fiscal year ended June 30, 2017.
SPLISH PHARMACEUTICAL INDUSTRIES
SELECTED BALANCE SHEET
INFORMATION
JUNE 30, 2017
$1,000,000
5,060,000
5,900,000
$11,960,000
$1,287,500
990,000
4,070,000
6,060,000
$12,407,500
The following transactions have also occurred at Splish.
For the fiscal year ended June 30, 2017, calculate the following for Splish Pharmaceutical Industries. (Round answers to 2 decimal places, e.g. $2.45.)
(a) Basic earnings per share.
(b) Diluted earnings per share.
Open Show Work
| SPLISH PHARMACEUTICAL INDUSTRIES | ||
| Long-term debt | ||
| Notes payable, 9% | $1,000,000 | |
| 8% convertible bonds payable | 5,060,000 | |
| 9% bonds payable | 5,900,000 | |
| Total long-term debt | $11,960,000 | |
| Shareholders’ equity | ||
| Preferred stock, 6% cumulative, $50 par value, 103,000 shares authorized, 25,750 shares issued and outstanding | $1,287,500 | |
| Common stock, $1 par, 9,900,000 shares authorized, 990,000 shares issued and outstanding | 990,000 | |
| Additional paid-in capital | 4,070,000 | |
| Retained earnings | 6,060,000 | |
| Total shareholders’ equity | $12,407,500 |
Solution
a. Basic EPS = (Net Income - Preferred Dividends)/weighted average shares
= (14,80,000 - 77,250)/ 9,90,000 = 1.42
preferred dividend = 25750*50*6% = 77250
b. Diluted EPS
First we will test for dilution
Convertible bonds = interest on bonds/number of shares converted
2,42,880/2,53,000 = 0.96
Interest on bonds after tax = 50,60,000*8%*(1-0.40) = 242,880
Number of converted shares = (50,60,000/1000)*50 = 253,000
Compared to Basic EPS which is 1.42, 0.96 is lower so convertible bonds are dilutive.
Stock options: (Market Price - Option Price)/Market price * number of options warrant
(20-15)/20 *2,00,000 = 50,000
As average market price is more than option price it is dilutive
Now diluted EPS = Net Income - Preferred Dividend + interest net of tax)/ Common shares+ converted shares
(14,80,000 - 77,250 + 242,880)/ 9,90,000 + 253000+ 50000
= 16,45,630/12,93,000
=1.27
