Problem 168 The information below pertains to Oriole Company

Problem 16-8

The information below pertains to Oriole Company for 2018.

There were no changes during 2018 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 70,500 shares of common stock at $20 per share.

(a) Compute basic earnings per share for 2018. (Round answer to 2 decimal places, e.g. $2.55.)

(b) Compute diluted earnings per share for 2018. (Round answer to 2 decimal places, e.g. $2.55.)

Open Show Work

Net income for the year		$1,140,000
7% convertible bonds issued at par ($1,000 per bond); each bond is convertible into     30 shares of common stock		1,900,000
6% convertible, cumulative preferred stock, $100 par value; each share is convertible      into 3 shares of common stock		3,870,000
Common stock, $10 par value		5,700,000
Tax rate for 2018		40%
Average market price of common stock		$25 per share

Solution

Formula & Explaination Earnings Per Share=(Net Income-Preferred Dividend)/Number of shares of common stock outstanding Diluted Earnings Per Share=Company uses if converted method when convertible preferred and bonds outstanding. so take the effect of tax benefit of convertible bonds,but there is no tax effect due to convertible preferred stock. Diluted EPS is allways less than the EPS. Diluted Earnings Per Share=(Net Income after tax+After tax interest on convertible bonds+Convertible Preferred Dividend)/Weighted average common stock outstanding during the period+All dilutive potential common stock) Oriole Company Net Income $ 1,140,000.00 Weighted average common stock outstanding=($5700000/10) 570000 Preferred Dividend=($3870000*6%) $      232,200.00 a) EPS=($1140000-$232200)/570000 $                   1.59 b) Bonds Interest=($1900000*.07) $      133,000.00 Interest savings net of tax=($133000*(1-.40) 79800 Increase Shares=((Market Price-Option Price)/Market Price))*Option Shares Increase Shares=(($25-$20)/25)*70500 14100 Bonds converted into shares=($1900000/$1000)*30 57000 Preferred stock converted into shares=($3870000/$100)*3 116100 Total common stock outstanding=(570000+14100+57000+116100) 757200 Diluted Earnings Per share=(Net Income-Interest savings net of tax)/Number of commonstock outstanding Diluted Earnings Per share=($1140000-$79800)/757200 $                   1.40