Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 71

Calculate basic EPS, and explain the EPS effect of convertible preferred

Thrifty Co. reported net income of $465,000 for its fiscal year ended January 31, 2011. At the beginning of that fiscal year, 200,000 shares of common stock were outstanding. On October 31, 2010, an additional 60,000 shares were issued. No other changes in common shares outstanding occurred during the year. Also during the year the company paid the annual dividend on the 25,000 shares of 7%, $40 par value preferred stock that were also outstanding the entire year.

Required:

a. Calculate basic earnings per share of common stock for the year ended January 31, 2011.

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b. If Thrifty Co.’s preferred stock were convertible into common stock, what additional calculation would be required?

Step 1 of 4

Calculate basic EPS & Explain the EPS effect of convertible preferred

Convertible preferred: Preferred stock that contains an option for the stock holder to convert their preferred shares holdings into a particular number of common shares, typically anytime after a specified date.

Basic EPS: A basic EPS refers to the rough estimation of a firm's profit amount that can be owed to one share of its common stock. Basic EPS do not part in the dilutive effects shared on convertible securities. Usually, basic EPS is computed as follows: