The following are selected details of Simple Objects Inc.’s capital structure as at January 1, 2018: 

■ 300,000 ordinary shares were issued; 250,000 were outstanding. 

■ Bonds A—$1,000,000, 3%, semi-annual bonds maturing December 31, 2026. At the option of the holder, each $1,000 bond can be converted into seven ordinary shares at any time prior to maturity. 

■ Bonds B—$2,000,000, 5%, semi-annual bonds maturing December 31, 2024. At the option of the holder, each $1,000 bond can be converted into six ordinary shares at any time prior to maturity. 

■ 10,000 non-cumulative preferred shares “A” that are each entitled to dividends of $3 per annum. At the option of the holder, each preferred share can be converted into two ordinary shares. 

■ 100,000, $100 non-cumulative shares “B” with a stated dividend rate of 4% per annum. At the option of the holder, each preferred share can be converted into three ordinary shares. 

■ Employee stock option—grants the holder the right to purchase 8,000 ordinary shares at any time before December 31, 2022, for $10 per share. 

■ Warrant—grants the holder the right to purchase 5,000 ordinary shares for $8 per share. 

The warrant, which can be exercised at any time, expires on December 31, 2024. 

During the year, Simple Objects issued and redeemed ordinary shares as follows: 

■ March 1, 2018—declared and issued a two-for-one stock split. 

■ July 1, 2018—sold 20,000 ordinary shares from treasury. 

■ September 1, 2018—repurchased 10,000 ordinary shares and held them as treasury shares. 

■ October 1, 2018—sold 30,000 ordinary shares from treasury.

Simple was subject to a 25% tax rate. Its net income for the year ended December 31, 2018, totalled $3,300,000. In 2018 the average market price for Simple’s ordinary shares was $12. 

Simple declared dividends totalling $500,000 on December 15, 2017, payable on January 15, 2018. Of the $500,000, $30,000 pertained to the preferred “A” shares; $400,000 related to the preferred “B” shares; with the balance being allocated to the ordinary shares. Dividends were not declared in 2018.

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 factors for the convertible bonds and preferred shares have already been adjusted for the stock split. 

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

Required:

a. Calculate Simple’s basic EPS for the year ended December 31, 2018. 

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 Simple’s diluted EPS for the year ended December 31, 2018.