The following information relates to the capital structure of Metcalf Corp.:

During 2011 Metcalf paid $90,000 in dividends on the preferred stock. Metcalf's net income for 2011 was $1,960,000 and the income tax rate was 40 percent. For the year ended December 31, 2011, the diluted earnings per share is
A) $7.29.
B) $7.43.
C) $8.17.
D) $8.29.

Question

The following information relates to the capital structure of Metcalf Corp.:

During 2011 Metcalf paid $90,000 in dividends on the preferred stock. Metcalf's net income for 2011 was $1,960,000 and the income tax rate was 40 percent. For the year ended December 31, 2011, the diluted earnings per share is
A) $7.29. 
B) $7.43. 
C) $8.17. 
D) $8.29.

Quizplus · Accepted Answer

First, we need to calculate the earnings available to common shareholders by subtracting the preferred dividends from the net income:

Earnings available to common shareholders = Net income - Preferred dividends
= $1,960,000 - $90,000
= $1,870,000

Next, we need to adjust for the potential dilution from any stock options or convertible securities. The problem does not provide this information, so we can assume that diluted EPS is the same as basic EPS.

Finally, we can calculate EPS by dividing the earnings available to common shareholders by the weighted average number of common shares outstanding:

EPS = Earnings available to common shareholders / Weighted average number of common shares outstanding
= $1,870,000 / 252,000
= $7.43

The Following Information Relates to the Capital Structure of Metcalf