During its fiscal year,Deerborn Distributing had net income of $100,000 (no extraordinary items)and 50,000 shares of common stock and 10,000 shares of preferred stock outstanding.Deerborn declared and paid dividends of $.50 per share to common and $6.00 per share to preferred.The preferred stock is convertible into common stock on a share-for-share basis.For the year,Deerborn Distributing should report diluted earnings (loss)per share of
A) $(0.80).
B) $1.00.
C) $1.67.
D) $2.67.

Question

Quizplus · Accepted Answer

First, we need to calculate the earnings per share (EPS) for Deerborn Distributing using the net income and the weighted average number of shares outstanding:

EPS = Net Income / Weighted Average Shares Outstanding

Weighted Average Shares Outstanding = (Common Shares Outstanding x Fraction of Year) + (Preferred Shares Outstanding x Fraction of Year x Conversion Factor)

Fraction of Year = 1 (since no information is given on when during the year the shares were outstanding)

Conversion Factor = 1 (since the preferred shares are convertible on a one-to-one basis)

Weighted Average Shares Outstanding = (50,000 x 1) + (10,000 x 1 x 1) = 60,000

EPS = $100,000 / 60,000 = $1.67

Next, we need to calculate the diluted EPS to account for the conversion of preferred shares. To do this, we assume that all preferred shares are converted into common shares:

Weighted Average Shares Outstanding (assuming conversion of preferred shares) = Common Shares Outstanding + Preferred Shares Outstanding

Weighted Average Shares Outstanding (assuming conversion of preferred shares) = 50,000 + (10,000 x 1) = 60,000

Diluted EPS = Net Income / Weighted Average Shares Outstanding (assuming conversion of preferred shares)

Diluted EPS = $100,000 / 60,000 = $1.67

Since the diluted EPS is the same as the basic EPS, there is no dilution and the answer is C.

During Its Fiscal Year,Deerborn Distributing Had Net Income of $100,000