Problem Facts Information related to the Sosa Company for the year 2020: Common Stock As of the end of 2020, Sosa had 240,000 shares of common stock outstanding. The shares are due to the following common stock transactions: ? January 1, 2020 – 100,000 shares of common stock outstanding ? April 1, 2020 – issued an additional 50,000 shares for cash ? July 1, 2020 - issued a 2 for 1 stock split ? September 1, 2020 – purchased 60,000 shares for treasury stock Preferred Stock As of the end of 2020, Sosa had 30,000 shares of 6%, $10 par value, cumulative, convertible preferred stock outstanding. The stock had been outstanding all year and the conversion ratio was each share of preferred stock is convertible into 3 shares of common stock. Bonds Payable As of the end of 2020, Sosa had $800,000, 7% bonds payable outstanding. The bonds had been outstanding for the entire year and each $1,000 bond was convertible into 10 shares of common stock. Options Sosa also had 10,000 common stock options outstanding all year. Each option allowed the holder to purchase 1 share of Sosa’s common stock for $45. During 2020, the average market price of Sosa’s common stock was $48 per share. Additional Information Sosa’s 2020 net income was $580,000, and the company’s income tax rate was 34%. REQUIRED
1. Compute the weighted average number of common shares Sosa will use to compute basic earnings per share.
2. Compute 2020 basic earnings per share.
3. Identify which of the potentially dilutive securities (preferred stock, bonds, options) are dilutive (support must be shown to receive credit for this question)
4. Compute diluted earnings per share.
Basic EPS = $2.20
Diluted EPS = $1.68