The Shareholders’ Equity section of Holiday Roads Company’s balance sheet shows:
Net income for 2014 was $1,700,000, preferred stock dividends were $200,000, and common stock dividends were $500,000. The company issued 60,000 shares of common stock on July 1, 2014. Required:
1. What is the company’s basic EPS for 2014?
2. Suppose that Holiday Roads also had $500,000 of 10% convertible subordinated debentures outstanding at the beginning and end of 2014. Each $1,000 bond is convertible into 100 shares of common stock, cash settlement is not permitted, and the company’s income tax rate is 34%. What is the company’s diluted EPS for 2014?
3. What other types of securities in addition to convertible debt can affect the calculation of diluted EPS?
4. During 2013, Holiday Roads Company granted options to employees that allowed them to buy 50,000 shares at an exercise price of $10 per share, which was also the market price per share on the grant date. The options may be exercised beginning in 2016. The average market price per share of the company’s shares in 2014 was $23. Building on requirement 2, what would be the company’s diluted EPS for 2014 in light of both the convertible subordinated debentures and the employee stock options?
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