follow up on chapter 16 Earnings per share

Earnings per share

indicates the income earned by each share of common stock.

Equation for earning per share

(net income - preferred stock)/ weighted number of shares

Companies report earnings per share only for

common stock

Weighted-Average Number of Shares Outstanding

Companies must weight the shares by the fraction of the period they are outstanding.
When stock dividends or share splits occur, companies need to restate the shares outstanding before the share dividend or split.

Mayfield Corporation has net income of $210,000 for the year and a weighted-average number of common shares outstanding during the period of 100,000 shares. The company has two convertible debenture bond issues outstanding. One is a 6 percent issue sold at 100 (total $1,000,000) in a prior year and convertible into 20,000 common shares. Interest expense on the 6 percent convertibles is $60,000. The other is a 10 percent issue sold at 100 (total $1,000,000) on April 1 of the current year and convertible into 32,000 common shares. Interest expense on the 10 percent convertible bond is $75,000. The tax rate is 40 percent.

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Calculate basic earnings per share.

210,000 (net income) / 100,000 (Number of shares) = $2.10

Calculate the weighted average number of shares adjusted for dilutive securites

100,000 (weighted average number of shares outstanding)
+Shares to be issued
20000 (6% debentures)
24000 (10% debentures 9/12*32000)

Total weighted average number of shares adjusted = 144000

Calculate diluted earnings per share.

[200000+60000(1-.4)+100000(1-.4)x9/12]
/[100000+20000+24000]

=2.02

calculate basic earnings per share

Revenues $17,500
Expenses -8,400
Bond interest expense (60 x $1,000 x 8%) -4,800
Income before taxes =4,300
Income tax expense (40%) -1,740
Net income =$ 2,580

2580/2000 = 1.29

calculate diluted earnings per share

(2580+ 4800.6)/(2000+ 60100) = .68