# Diluted EPS

The following data pertains to the Sapphire Company: * Net income equals \$15,000 * 5,000 shares of common stock issued on January 1st * 10 percent stock dividend issued on June 1st * 1000 shares of common stock were repurchased on July 1st * 1000 shares of 10 percent, \$100 par preferred stock each convertible into 8 shares of common were outstanding the whole year What is the company’s diluted earnings per share (EPS)? A) \$1.00. B) \$2.50. C) \$1.15. D) \$1.20.

C: \$1.15

Shares outstanding = 5000 + 0.10*5000 - 1000*6/12 = 5,000 Basic EPS = [15,000 - 10,000 (Pref. Div = 1,000*100*10%)] / 5,000 --> \$1 Increase in Shares O/S due to pref shares = 1000*8 = 8,000 Diluted EPS = 15,000/(5,000+8,000) = \$1.15

WANOSO = 5500*12 - 1000*6 = 60K/12 = 5K NI = 15K PD = 10% * 100 = 10 * no of shares = 10 * 1000 = 10K Basic EPS = (NI - PD)/ WANOSO = (15K - 10K) /5K = 1 so , Basic EPS = \$1.00 Now check if the conversion is dilutive or anti-dilutive adjustments in Num = add back PD’s = 10K adjustments in Deno = increase in no or shares = 8 * 1000 = 8K 10K/8K = 1.25 > Basic EPS … so conversion is anti-dilutive … IGNORE IT Dilites EPS = Basic EPS = \$1.0 is A the answer?? - Dinesh S

Ha…thats correct Dinesh…forgot to notice that my “Dilutive” EPS is actually higher than the basic one…Ans should be A.

Yeah it should be A