Problem 1

Corona, Inc., reported the following securities December 31, 2021:

Common shares 20,000 outstanding.

Preferred shares, $3 (annual), cumulative 6,000 shares outstanding. These shares were also convertible into common shares 5-for-1. Dividends on these shares are paid quarterly on March 31, June 30, September 30 and December 31.

6% $200 convertible bonds outstanding at par value, $600,000. The bonds are convertible into 12,000 common shares. Annual interest on the bonds is payable on December 31.

5,000 warrants, each entitling the holder to purchase 8 common shares of Corona Inc at $30 each.

3,000 put options, each entitling the holder to sell 2 common shares of Corona Inc at $18 each.

Additional Information

On March 1, the company had issued 8,160 common shares under a takeover agreement wherein Corona Inc bought all of the operating assets of Pfizar Corporation.

On April 1, some of the preferred shareholders exercised their conversion rights and the company issued 10,000 common shares to them.

On April 30, the company declared a 3:1 stock split for common shares. All conversion and price variables were also adjusted proportionately.

On May 1, the company repurchased 4,350 common shares in the market and cancelled them.

Assume the average market price of the common shares to be $15 per share before taking into account the effect of the stock split.

Dividends on the preferred shares were declared and paid when they came due to all preferred shareholders existing on the dividend date.

The company reported a basic earnings per share of $1.204 in 2022. There were no extraordinary or discontinued items to report in 2022. The tax rate was 40%.

REQUIRED:

1. Determine the weighted average number of common shares to use in calculating the basic earnings per share.

2. Determine the amount of dividends declared and paid to the preferred shareholders during 2022.

3. Calculate the amount of the adjusted net income available to common shareholders which is to be used as the numerator in the basic earnings per share calculation for the year ended December 31, 2022.

4. Identify the potentially dilutive securities which could be included in calculating the computation of diluted earnings per share. Be sure to support your answer with appropriate computations and rank these securities where required (use 3 decimals).

5. Determine the diluted earnings per share to be reported by the company in 2022 (use 3 decimals).