
Concept explainers
1.
Compute the basic earnings per share for Company M.
1.

Explanation of Solution
Earnings per share (EPS):
The amount of net income available to each shareholder per common share outstanding is referred to as earnings per share (EPS).
Compute the basic earnings per share for Company M.
Working notes:
(1) Calculation of weighted average shares outstanding:
(Figure 1)
2.
Compute the tentative and incremental dilutive earnings per share for each dilutive security.
2.

Explanation of Solution
Compute tentative diluted EPS for stock options.
Compute the incremental diluted EPS for stock options.
Compute the incremental diluted EPS for convertible bonds.
Compute the incremental diluted EPS of convertible preferred stock.
Compute tentative diluted EPS assuming for 12% convertible preferred stock.
Compute tentative diluted EPS assuming, exercisable options, 9% convertible bonds, and 12% convertible preferred stock.
Working notes:
(1) Calculate the value of exercisable options:
(2) Compute the number of shares required:
(3) Compute the total weighted average number of common shares.
(Figure 2)
(4) Compute the amount of interest expense, net of income tax on 9% bonds.
(5) Compute the number of common shares due to conversion of 9% bonds.
(6) Compute the number of common shares due to conversion of preferred shares.
3.
Identify the amount that will be reported as basic and diluted earnings per share for the year 2019.
3.

Explanation of Solution
The Company M must report an amount of $1.95 as basic earnings per share and $1.64 as diluted earnings per share in its 2019 income statement.
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Chapter 16 Solutions
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