Answer:
Basic Earnings per Share = $5.76 and
Diluted Earnings per Share = $4.11
Explanation:
Basic Earnings per Share = Earnings Attributable to Holders of Common Stock ÷ Weighted Average Number of Common Stocks
Calculation of Earnings Attributable to Holders of Common Stock :
Net income for the year ended December 31, 2016 $780,000
Less Preference Shares dividends (28,800 × $5) ($144,000)
Less Interest on convertible bonds ( $1,000,000 × 10% × 60%) ($60,000)
Earnings Attributable to Holders of Common Stock $576,000
Calculation of Weighted Average Number of Common Stocks :
Common Stocks Outstanding 100,000
Weighted Average Number of Common Stocks 100,000
Thus,
Basic Earnings per Share = $576,000 ÷ 100,000
= $5.76
Diluted Earnings per Share = Adjusted Earnings Attributable to Holders of Common Stock ÷ Adjusted Weighted Average Number of Common Stocks
Calculation of Adjusted Earnings Attributable to Holders of Common Stock :
Net income for the year ended December 31, 2016 $576,000
Add Preference Shares dividends (28,800 × $5) ($144,000)
Add Interest on convertible bonds ( $1,000,000 × 10% × 60%) ($60,000)
Earnings Attributable to Holders of Common Stock $780,000
Calculation of Adjusted Weighted Average Number of Common Stocks :
Common Stocks Outstanding 100,000
Add Convertible preferred shares 60,000
Add convertible bonds 30,000
Adjusted Weighted Average Number of Common Stocks 190,000
Thus,
Diluted Earnings per Share = $780,000 ÷ 190,000
= $4.11
