Given the following financial structure for Company S for all of 2017:

Common stock, $1 par value, 500,000 shares issued and outstanding all year.

Convertible preferred stock, 90,000 shares, $100 par value, 4% cumulative dividend, each share convertible into 3 shares of common stock.

Convertible bonds, $500,000 face value, 6% stated rate, each $1,000 bond is convertible into 20 shares of common stock.

Stock options - 200,000 options outstanding, each option convertible for one share of stock at an option price of $40 per share.

Additional information for 2017:

1. The convertible bonds were issued at par in 2015.

2. The average market price per share for the common stock was $50 in 2017.

3. The income tax rate for Company S is 30 percent.

4. Net income for Company S for 2017 was $1,200,000.

A. (3 points) On the answer sheet, calculate Basic EPS (carry calculations to 2 decimal places).

B. (6 points) On the answer sheet, show your calculations for the numerator and denominator effect of each of the above convertible securities. (This part of the answer sheet will allow me to give partial credit, even if you result is wrong.)

C. (1 point) From your calculations in Part B, complete the schedule to calculate the dilution index of each convertible security, then indicate the ranking (most dilutive = 1) of each convertible security.

D. (4 points) Using the indexes above to incrementally evaluate the dilutive effect, calculate diluted earnings per share in the space provided on the answer sheet. Show the DEPS calculation at each incremental stage, and carry the calculation to 2 decimal places. CIRCLE the DEPS number that would be displayed in the financials.

A. Basic EPS (show calculations):

B. Calculations for Diluted EPS (numerator and denominator effect) show your work for the numerator and denominator calculations and carry to Part C.

(1) Stock options:

Numerator:____________________________________________

Denominator: __________________________________________

(2) Convertible bonds:

Numerator: __________________________________________

Denominator: __________________________________________

(3) Convertible preferred stock:

Numerator: ________________________________________

Denominator: ___________________________________________

C. Using your results in Part B, complete the schedule below to rank the convertible securities:

Numerator Denominator Index Ranking

Stock options ________ _________ ________ ________

Convertible bonds ________ _________ ________ ________

Convertible preferred ________ _________ ________ ________

4. From your rankings in Part C, show the incremental calculation of Diluted EPS, with the resulting DEPS number at each stage (CIRCLE the number that would be displayed in the financials for DEPS. (note: you may delete the lines to make formatting easier)

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