Reference no: EM132908339
Question - You have been provided with the following information for Company 123 for the year 2020:
Net income $ 4,800,000 Number of common shares outstanding 1,200,000 shares 10%, cumulative preferred shares, convertible into 120,000 common shares $ 1,800,000 8% convertible bonds; convertible into 100,000 common shares $ 9,500,000 360,000 call options exercisable at $ 26 per share
Additional information
1. The common and preferred shares and the convertible bonds were outstanding from the beginning of the year.
2. In 2020, a $ 1, 500,000 dividend was declared and distributed; however, no dividends were declared in 2019.
3. The average market price of the common shares in 2020 was $ 0. The stock price was $ 27 on January 1, 2020, and $ 5 on December 31, 2020.
4. The convertible bonds were sold at par.
5. The income tax rate for 2020 is 40%.
Required -
a) Calculate basic earnings per share.
b) Calculate diluted earnings per share.
c) Why is earnings per share useful? What is the additional importance of reporting diluted earnings per share?
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