Question

Information from the financial statements of Henderson-Niles Industries included the following at December 31, 2018: Common shares outstanding throughout the year: 100 million Convertible preferred shares (convertible into 10 million shares of common): 30 million Convertible 10% bonds (convertible into 17.0 million shares of common): $ 2,200 million Henderson-Niles’s net income for the year ended December 31, 2018, is $840 million. The income tax rate is 40%. Henderson-Niles paid dividends of $2 per share on its preferred stock during 2018. Required: Compute basic and diluted earnings per share for the year ended December 31, 2018. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Answer 1

Basic EPS for Henderson-Niles Industries is $7.80 per share, subtracting preferred dividends from net income and dividing by common shares. Diluted EPS is $7.18 per share, which considers the effect of convertible preferred shares and bonds on the share count and net income.

Step-by-step explanation:

The student is asked to calculate basic and diluted earnings per share (EPS) for the year ended December 31, 2018, for Henderson-Niles Industries. To calculate basic EPS, we begin by subtracting the preferred dividends from the net income and then dividing by the average number of common shares outstanding. The preferred dividends paid are 30 million shares times $2 per share, which equals $60 million. Therefore, basic EPS is calculated as ($840 million - $60 million) ÷ 100 million shares = $7.80 per share.

To calculate diluted EPS, we consider the effect of convertible preferred shares and convertible bonds. For the convertible preferred shares, since they are convertible into 10 million common shares, the adjustment involves adding the 10 million shares to the denominator. The convertible bonds would add 17 million shares but also involve an adjustment for the after-tax interest on the bonds, which is $2,200 million at 10% interest for $220 million and then reduced by the tax rate of 40% to add back $132 million to the numerator. Hence, the diluted EPS calculation would be ($840 million - $60 million + $132 million) ÷ (100 million + 10 million + 17 million shares) = $912 million ÷ 127 million shares = $7.18 per share.

Answer 2

The basic and diluted earnings per share for the year ended December 31, 2018 are $ 0.24 / Share and $8.89 /share respectively.

Step-by-step explanation:

BASIC EPS CALCULATION

The preferred dividend = 30 million x $ 2/share

= 60 Million

Basic EPS = ( Net income - preferred dividends ) / weighted average common shares

= ($840 million - $ 60 Million ) / 100 million

= $ 0.24 / Share

DILUTED EPS CALCULATION

After-tax bond interest expense = $ 2.200 million x 10%

= $ 220 Million

$ 220 Million x (100 + 40%) = $ 308 Million after-tax interest expense.

Shares assume converted to common

Common Shares = 100 Million

Preferred stock = 40 Million

Convertible bonds = 17.0 Million

Total = 157 Million shares outstanding

Diluted EPS = ( $ 840 Million - $60 Million + $308 Million+ $ 66 Million ) / 157 million

= $8.89 /share

Therefore, The basic and diluted earnings per share for the year ended December 31, 2018 are $ 0.24 / Share and $8.89 /share respectively.