P5 On December 312017 Warrior Company presented the followin

P5. On December 31,2017, Warrior Company presented the following data Net income after income tax and interest expenses $2,300,000. Common stock with $50 par: # of shares outstanding as of 1/1/2017 # of shares issued for cash on 6/1/2017 # of shares reacquired on 9/1/2017 (T/S) 1,000,000 480,000 240,000 4% Convertible Preferred stock with $100/share par # of shares of C-PS 50,000 Conversion ratio to C/S-2 for l; i.e., l share of P/S will become 2 shares of C/S The income tax rate is 30%. Warrior issued 1,000 shares of $1,000 par value, 6%, 5 year convertible bonds for $1,100 per share on January 1, 2017. The interests are payable annually at the end of each yeair. Each $1,000 bond can be converted to 50 shares of common stock within 5 year from 1/1/2017. Coyote uses the straight-line method to amortize premium on bonds. None of these bonds have been converted to date. On January 1, 2017, Warrior adopted a stock option plan that granted options to key executives to purchase 100,000 shares of common stock at S60/share. The fair market value of the option was $25,000 on 1/1/2017. None of these options have been exercised to date. The vesting period of the stock option is 5 years from 1/1/2017. The average market price of C/S during 2017 is $80/share. Instructions 1) Compute Basic EPS for 2017. 2) Compute Diluted EPS for 2017.

Solution

1) Basic EPS

2) Diluted EPS for 2017

When calculating weighted average shares for diluted eps, we assume all the convertible prefered stock, bonds and options are converted or exercised at the beginning of the period.

Recalculating no of shares for diluted eps

*refer to working below

Since preference shares, bonds are converted to shares, interest on bonds and preferred dividend is not paid during the year. We recalculate the net Income after taxes without the interest on bonds.

Date	Opening balance (a)	Issued (b)	Purchased (\'c)	Closing balance(d=a+b-c)	Weightage (\"e)	Weighted Average(f=d*e)
01/01/2017	1000000			1000000	12/12	1000000
06/01/2017	1000000	480000		1480000	7/12	863333
09/01/2017	1480000		240000	1240000	4/12	413333
					No of shares	2276667