EPS Question

[CFAHouston]

Ajax Company's capital structure was as follows:

December 31, 2004 December 31, 2003


Outstanding shares of stock:

Common 200,000 200,000

Convertible preferred 5,000 5,000

6% Convertible Bonds $500,000 $500,000


During 2004, Ajax paid dividends of $2.00 per share on its preferred stock.
The preferred shares are convertible into 10,000 shares of common stock.
The 6 percent bonds are convertible into 15,000 shares of common stock.
Net income for 2004 was $400,000.
Assume that income tax rate is 40%.
Ajax�s basic and diluted earnings per share for 2004 are:

Basic EPS Diluted EPS


A) $1.80 $1.86

B) $1.95 $1.86

C) $1.95 $1.95

D) $1.80 $1.95



Edited 1 time(s). Last edit at Wednesday, April 26, 2006 at 11:58AM by CFAHouston.

 

[satyaa]

I Think the answer is (B).

Basic EPS = (400,000 - 2*5000)/200,000 = $1.95

Both preferred stock and concertible bond are dilutive.

Diluted EPS = (400,000 - 10,000 + 10,000 + (500,000*0.06*0.6))/(200,000+10,000+15,000)

Diluted EPS = $1.85777

 

[jamespucyk]

Bang on, I didn't look at your response and got that one down in about 1:10 flat, thanks to schweser.

 

[CFAHouston]

Ah, stop bragging

J/K. Good job.

 

[jamespucyk]

LOL, gotta keep the spirits up before the exam . thx.