The following are selected details of Kitchener Fasteners Inc.’s capital structure as at January 1, 2021: 

■ 100,000 ordinary shares issued and outstanding. 

■ 10,000, $100 cumulative preferred shares “A” with a stated dividend rate of 2% per annum. At the option of the holder, two preferred shares can be exchanged for one ordinary share on or before December 31, 2026. 

■ 50,000 non-cumulative shares “B” that are each entitled to dividends of $3 per annum. 

■ Bonds A—$1,000,000, 5%, semi-annual bonds maturing December 31, 2026. 

■ Bonds B—$1,000,000, 4%, semi-annual bonds maturing September 30, 2028. At the option of the holder, each $1,000 bond can be converted into 10 ordinary shares at any time between January 1, 2025, and December 31, 2025, and into 11 ordinary shares thereafter. 

■ Bonds C—$800,000, 3%, semi-annual bonds maturing December 31, 2027. At the option of the holder, each $1,000 bond can be converted into nine ordinary shares. 

■ Option A—grants the holder the right to purchase 20,000 ordinary shares at any time before December 31, 2025, for $26 per share. 

■ Option B—grants the holder the right to purchase 15,000 ordinary shares for $15 per share. 

The option expires on December 31, 2025. During the year, Kitchener’s ordinary shareholdings changed as follows: 

■ February 1, 2021—repurchased 20,000 ordinary shares and held them as treasury shares. 

■ September 1, 2021—issued (sold) 10,000 ordinary shares from treasury. 

■ November 1, 2021—declared and distributed a two-for-one stock split. 

Kitchener was subject to a 20% tax rate. Net income for the year ended December 31, 2021, was $800,000. During the year, dividends were neither declared nor paid. The average market rate in 2021 for Kitchener’s ordinary shares was $17. 

The recorded exercise prices and number of shares under the stock options plans that can be acquired have already been adjusted for the stock split. Similarly, the recorded conversion factor for the convertible bonds and preferred shares has already been adjusted for the stock dividend. 

Assume that the effective rate of interest on the bonds equals the coupon rate. 

Required:

a. Calculate Kitchener’s basic EPS for the year ended December 31, 2021. 

b. Prepare a schedule that sets out the income effect, share effect, and incremental EPS for each security that is convertible into ordinary shares. Rank the potential ordinary shares by their dilutiveness. 

c. Calculate Kitchener’s diluted EPS for the year ended December 31, 2021.