Assignment: Impact on EPS and Rankings
Mills Company had five convertible securities outstanding during all of 2016. It paid the appropriate interest (and amortized any related premium or discount using the straight-line method) and dividends on each security during 2016. Each convertible security is described in the following table. The corporate income tax rate is 30%.
Security Description
9.5% preferred stock $200,000 par value. Issued at 112. Each $100 par preferred stock is convertible into 4.2 shares of common stock.
11.0% bonds $220,000 face value. Issued at par. Each $1,000 bond is convertible into 44 shares of common stock.
8.0% preferred stock $150,000 par value. Issued at par. Each $100 par preferred stock is convertible into 3.8 shares of common stock.
10.0% bonds $100,000 face value. Issued at 94. Discount being amortized over 20-year life. Each $1,000 bond is convertible into 55 shares of common stock.
9.0% bonds $200,000 face value. Issued at 108. Premium being amortized over 25-year life. Each $1,000 bond is convertible into 48 shares of common stock.
Required:
1. & 2. Prepare a schedule that lists the impact of the assumed conversion of each convertible security on diluted earnings per share and, also prepare a ranking (from 1 to 5) of the order in which the securities would be included in the diluted earnings per share computations.
Note: The convertible security having the most dilutive impact on diluted earnings per share is listed at the top of the ranking or "1". If required, round your "Impact" answers to two decimal places.
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Mills Company
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Schedule of Impact on EPS and Rankings
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Impact
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Ranking
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9.5% preferred
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11.0% bonds
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8.0% preferred
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10.0% bonds
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9.0% bonds
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Convertible Securities and Earnings per Share
Francis Company has 20,000 shares of common stock outstanding during all of 2016. It also has two convertible securities outstanding at the end of 2016. These are:
a. Convertible preferred stock: 2,000 shares of 9.5%, $50 par, preferred stock were issued on January 2, 2016, for $60 per share. Each share of preferred stock is convertible into 3 shares of common stock. Current dividends have been declared. To date, no preferred stock has been converted.
b. Convertible bonds: Bonds with a face value of $200,000 and an interest rate of 5.7% were issued at par in 2015. Each $1,000 bond is convertible into 22 shares of common stock. To date, no bonds have been converted.
Francis earned net income of $61,500 during 2016. Its income tax rate is 30%.
Required:
(a) Compute the 2016 diluted earnings per share. Round your answer to two decimal places.
(b) What basic earnings per share amount would Francis report on its 2016 income statement? Round your answer to two decimal places.