Question

ABC Co. had 600,000 shares of Common Stock, 40,000 shares of Convertible Preferred Stock, and $3,000,000 of 6% Convertible Bonds outstanding during 2021. The Convertible Preferred Stock is convertible into 80,000 shares of Common Stock. During 2021, ABC Co. paid dividends of $4 per share on the Common Stock and $3 per share on the Convertible Preferred Stock. Each $1,000 Convertible Bond is convertible into 80 shares of Common Stock. The Net Income for 2021 was $1,600,000 and the income tax rate was 30%.

Calculate basic earning per year of common stock for the year ended January1 31, 2104.
If company's preferred stock were convertiable into common stock what additional calculation would be required?

Answer 1

a. Net income for 2021 $1,600,000

Less: Preferred dividends $120,000 (40000*$3)

Net income for Common Stockholders $1,480,000

Divide by Common Shares outstanding 600,000

Basic Earnings per share for 2021 $2.47

b. If company's preferred stock were convertible into common stock, diluted earnings per shares will also have to be calculated.