EXAM 1 B Problem 1-1 (20 points) During all of 2018 Dawson Manufacturing Company had 950,000 shares of common stock outstanding. On June 30, 2018, the company issued 10,000 7 percent convertible bonds at par maturity value of each bond is $1,000. Each bond is convertible into 20 shares of common stock None were converted during 2018. Dawson also had 60,000 stock warrants outstanding for all of 2018. The option price is $10 per share. The market price of the common stock was $40 on December 31, 2018, and the average market price for 2018 was $30. Dawson reported a net income of $3,650,000 for 2018. Assume the company had a 40 percent income tax rate. (a) Compute the basic camings per share. Compute diluted earnings per share (ignore the order of incremental dilutive effect). Show your works. (b) par, (c) In addition to the above capital struc ture, assume that Dawson issued 28,000 shares of $100 t 110 on Jan. 1, 2018. Each share of pref 10% cumulative preferred st stock is convertible into I share of common stock. Compute diluted earnings per share (ignore the order of incremental dilutive effect). Show your works.
a.
Net income = $3,650,000
Number of common shares outstanding = 950,000
Basic earnings per share(3,650,000 / 950,000) =$3.84
b.
Common shares outstanding = 950,000
Convertible shares from bonds (10,000x20) = 200,000
Stock options warrants = 60,000
Total number of shares =1,210,000
Diluted EPS (3,650,000 / 1,210,000) = $3.02
c.
Net income =$3,650,000
Preferred dividend(7% x 100 x 28,000) =$196,000
Net income avaibble for common shares = $3,454,000
Diluted EPS - $3,454,000 / (1,210,000+28,000) = $2.79
We deduct the preferred dividend from net income to arrive at the net income available for common shares.
The common shares available from preferred stock on conversion shall be added to the already calculated total number of common shares after conversion.
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