| Details for the Problem | ||||||||||||||||
| Karen Company had 105,000 shares of common stock outstanding on January 1, 2011. On August 30, 2011, Karen sold 50,000 shares of common stock for cash. Karen also had 11,000 shares of convertible preferred stock outstanding throughout 2011. The preferred stock is $105 par, 5%, and is convertible into 4 shares of common for each share of preferred. Karen also had 400, 8%, convertible bonds outstanding throughout 2011. Each $1,000 bond is convertible into 35 shares of common stock. The bonds sold originally at par. Reported net income for 2011was $350,000 with a 35% tax rate. The regular common and preferred dividends were paid in 2011. |
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| 1 | Compute basic and diluted earnings per share for 2011 |
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| 2011 Shares Outstanding, Ending Balance | 2011 Weighted-Average Number of Shares Outstanding |
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| Date | Share Changes | Shares Outstanding | Dates Outstanding | Shares Outstanding | Fraction of Year | Weighted Shares | ||||||||||
| 1-Jan | Beginning Balance | 105,000 | ||||||||||||||
| 30-Aug | Shares sold for cash | 50,000 | Jan 1 – Aug 30 | 105,000 | 0.666667 | 70,000 | ||||||||||
| 31-Dec | Ending balance | 155,000 | Aug 30 – Dec 31 | 50,000 | 0.333333 | 16,666.67 | ||||||||||
| Weighted-average number of shares outstanding | 86,667 | |||||||||||||||
| Preferred dividends paid: |
$ 5.2500 | |||||||||||||||
| $ 27,563 | ||||||||||||||||
| 2011 BasicEarnings Per Share (EPS): |
$ 3.72 | |||||||||||||||
| Computation of Weighted-Average Number of Shares Adjusted for dilutive securities |
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| Computation of Adjusted Net Income | ||||||||||||||||
| Net Income for the year |
$ 350,000 | Weighted-average number of shares outstanding |
86,667 | |||||||||||||
| Add: Adjustment for interest (net of tax) | 0.35 | Add: Shares assumed to be issued: | ||||||||||||||
| 8% convertible bonds | $ 400 | 5% preferred stock (as of beginning of the year) |
5250 | |||||||||||||
| 8% convertible bonds (as of beginning of the year) |
8400 | |||||||||||||||
| Adjusted net income |
$ 122,900 | Weighted-average number of shares adjusted for dilutive securities |
100,317 | |||||||||||||
| 2011 Diluted Earnings Per Share (DEPS): |
1.23 | |||||||||||||||
| 2 | What is meant by dilution of earnings per share? |
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| Add explanation here !!! |
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| 3 | What is the “if converted method”? |
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| Add explanation here !!! |
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