Problem 1 (25 points):

Carter Construction had net income of $350,000. They began the year with 25,000

common shares issued and outstanding. On June 30, they issued 10,000 additional

shares. There were no other transactions affecting common stock. The average market

price of the common stock during the year was $30/share. The market price of the

common stock at the end of the year was $34/share. The company's marginal tax rate is

20%.The following information pertains to securities issued by the company. Each security was outstanding during the entire year.

1. 5,000 options to buy common stock with an exercise price of $28/share. In addition,

there is $4 of unrecognized compensation cost associated with each option.

2. 10,000 shares of 5%, $100 par, cumulative, non-convertible preferred stock with an

average market price of $105/share and an ending market price of $108/share.

3. 2,000 shares of 7%, $100 par, cumulative, convertible preferred stock with an

UOG Courses-Examination average market price of $109 and an ending market price of$107/share. Each shareof preferred stock is convertible into 5 shares of common stock.

4. 200 $1,000 bonds with a stated interest rate of 10%, convertible into 50 shares of

common stock, issued at 105. The premium is being amortized at the rate of

$500/year.

Compute Carter Construction's Basic Earnings per Share (5 points):

Given the information that you have about the options, are they potentially dilutive? Why

or why not (3 points)?

Given the information that you have about the shares of the 5%, $100 par preferred stock,are they potentially dilutive? Why or why not (3 points)?

Given the information you have about the shares of the 7%, $100 par preferred stock, are

they potentially dilutive? Why or why not (3 points)?

Given the information you have about the I 0% bonds, are they potentially dilutive? Why orwhy not (3 points)?

Rank each potentially dilutive security, beginning with the most dilutive (2 points).

Compute diluted earnings per share (6 points).