EPS Examples

Question 1

Information for Abbot Corporation for 2020:

• Net income of $1,400,000
• Common shares outstanding all year of 1,000,000
• During 2020, there were 20,000 shares of 10%, $100 par, cumulative, convertible preferred stock outstanding. Each share is convertible into twelve shares of common stock
• Abbot has 100,000 options to buy common stock at $20 a share outstanding. The market price of the common stock averaged $25 during 2020
• Abbot issued $10,000,000 of 7% convertible bonds at face value on June 30, 2020. Each $1,000 bond is convertible into 25 shares of common stock
• Tax rate is 30%

Compute basic and diluted earnings per share for 2020.

Answer 1

Preferred dividend: 20,000 x (100 x 10%) = 200,000
Basic EPS: (1,400,000 - 200,000) / 1,000,000 = 1.20

1. Options:
   - Proceeds: 100,000 x 20 = 2,000,000
   - Shares from exercise: 100,000
   - Treasury shares purchased: 2,000,000 / 25 = 80,000
   - Incremental shares: 100,000 - 80,000 = 20,000
   — 0 / 20,000 = 0
2. Bonds:
   - Interest expense, net of tax: (10,000,000 x 7% x 1/2) x (1 - 0.3) = 245,000
   - Shares issued if converted: 20,000 x 12 = 250,000
   — 245,000 / 250,000 = 0.98
3. Preferred stock:
   - Shares issued if converted: 20,000 x 12 = 240,000
   — 200,000 / 240,000 = 0.83

• Add Options:
  (1,400,000 - 200,000 + 0) / (1,000,000 + 20,000) = 1.18
• Add Preferred stock:
  (1,400,000 - 200,000 + 0 + 200,000) / (1,000,000 + 20,000 + 240,000) = 1.11
• Add Bonds:
  (1,400,000 - 200,000 + 0 + 200,000 + 245,000) / (1,000,000 + 20,000 + 240,000 + 250,000) = 1.09

Diluted EPS: 1.09

Question 2

Information for Baker Corporation for 2020:

• Net income of $3,500,000
• Common shares outstanding all year of 1,750,000
• During 2020, there were 50,000 shares of 5%, $100 par, cumulative convertible preferred stock outstanding. Each share is convertible into five shares of common stock. No dividends have been declared or paid for 2019 or 2020
• Baker has 50,000 options to buy common stock at $25 a share outstanding. The market price of the common stock averaged $35 during 2020
• Baker issued $10,000,000 of 6%, 15-year convertible bonds at face value on June 30, 2020. Interest is paid semi-annually on June 30 and December 31. Each $1,000 bond is convertible into 25 shares of common stock
• Baker issued $1,000,000 of 5%, 10-year, convertible bonds at 101 on January 1, 2017. Interest is paid annually on December 31. Baker uses straight-line amortization of bond discount or premium. Each $1,000 bond is convertible into 20 shares of common stock
• Tax rate is 20%

Compute basic and diluted earnings per share for 2020.

Answer 2

Preferred dividend: 50,000 x (100 x 5%) = 250,000
Basic EPS: (3,500,000 - 250,000) / 1,750,000 = 1.86

1. Options:
   - Proceeds: 50,000 x 25 = 1,250,000
   - Shares from exercise: 50,000
   - Treasury shares purchased: 1,250,000 / 35 = 35,714
   - Incremental shares: 50,000 - 35,714 = 14,286
   — 0 / 14,286 = 0
2. Bond A:
   - Interest expense, net of tax: (10,000,000 x 6% x 1/2) x (1 - 0.2) = 240,000
   - Shares issued if converted: (10,000,000 / 1,000) x 25 = 250,000
   — 240,000 / 250,000 = 0.96

Bond B:
- Premium amortization: 1,000,000 x 1.01 = 1,010,000
1,010,000 - 1,000,000 = 10,000
– 10,000 / 10 = 1,000 per year
- Interest expense, net of tax: 1,000,000 x 5% = 50,000
– 50,000 - 1,000 = 49,000
– 49,000 x (1 - 0.2) = 39,200
- Shares issued if converted: (1,000,000 / 1,000) x 20 = 20,000
— 39,200 / 20,000 = 1.96 (Anti-dilutive)

3. Preferred stock:
   - Shares issued if converted: 50,000 x 5 = 250,000
   — 250,000 / 250,000 = 1

• Add Options:
  (3,500,000 - 250,000 + 0) / (1,750,000 + 14,286) = 1.84
• Add Bonds A:
  (3,250,000 + 240,000) / (1,764,286 + 250,000) = 1.73
• Add Preferred Stock:
  (3,490,000 + 250,000) / (2,014,286 + 250,000) = 1.65

Diluted EPS: 1.65

Question 3

Information for Carter Corporation for 2020:

• Net Income of $1,500,000
• Common shares outstanding all year 1,000,000
• During 2020, there were 25,000 shares of 8%, $50 par, cumulative, convertible preferred stock outstanding. Each share is convertible into six shares of common stock
• Carter has 175,000 options to buy common stock at $10 a share outstanding. The market price of the common stock averaged $16 during 2020
• Carter issued $5,000,000 of 8% convertible bonds at face value on January 1, 2020. Each $1,000 bond is convertible into 40 shares of common stock
• Tax rate is 35%

Compute basic and diluted earnings per share for 2020.

Answer 3

Preferred dividend: 25,000 x (50 x 8%) = 100,000
Basic EPS: (1,500,000 - 100,000) / 1,000,000 = 1.40

1. Options:
   - Proceeds: 175,000 x 10 = 1,750,000
   - Shares from exercise = 175,000
   - Treasury shares: 1,750,000 / 16 = 109,375
   - Incremental shares: 175,000 - 109,375 = 65,625
   — 0 / 65,625 = 0
2. Bonds:
   - Interest expense, net of tax 5,000,000 x 8% x (1 - 0.35) = 260,000
   - Shares issued if converted (5,000,000 / 1,000) x 40 = 200,000
   — 260,000 / 200,000 = 1.30 (Anti-dilutive)
3. Preferred stock:
   - Shares issued if converted: 25,000 x 6 = 150,000
   — 100,000 / 150,000 = 0.67

• Add Options:
  (1,500,000 - 100,000 + 0) / (1,000,000 + 65,625) = 1.31
• Add Preferred Stock:
  (1,400,000 + 100,000) / (1,065,625 + 150,000) = 1.23

Diluted EPS: 1.23

Question 4

Information for Davis Corporation for 2020:

• Net Income of $1,150,000
• Common shares outstanding all year of 493,750
• During 2020, there were 50,000 shares of 5%, $100 par, cumulative, convertible preferred stock outstanding. Each share is convertible into four shares of common stock
• Davis has 75,000 options to buy common stock at $25 a share outstanding. The market price of the common stock averaged $30 during 2020
• Davis issued $3,000,000 of 6% convertible bonds at face value on January 1, 2020. Each $1,000 bond is convertible into 30 shares of common stock
• Tax rate is 30%

Compute basic and diluted earnings per share for 2020.

Answer 4

Preferred dividend: 50,000 x (5% x 100) = 250,000
Basic EPS: (1,150,000 - 250,000) / 493,750 = 1.82

1. Options:
   - Proceeds: 75,000 x 25 = 1,875,000
   - Shares from exercise: 75,000
   - Treasury shares purchased: 1,875,000 / 30 = 62,500
   - Incremental shares: 75,000 - 62,500 = 12,500
   — 0 / 12,500 = 0
2. Bonds:
   - Interest expense, net of tax: (3,000,000 x 6%) x (1 - 0.3) = 126,000
   - Shares issued if converted: (3,000,000 / 1,000) x 30 = 90,000
   — 126,000 / 90,000 = 1.40
3. Preferred stock:
   - 50,000 x 4 = 200,000 shares
   — 250,000 / 200,000 = 1.25

• Add options:
  (900,000 + 0) / (493,750 + 12,500) = 1.78
• Add preferred stock:
  (900,000 + 250,000) / (506,250 + 200,000) = 1.62
• Add bonds: (1,150,000 + 126,000) / (706,250 + 90,000) = 1.60

Diluted EPS = 1.60