Question 1

Supersonic Aero Inc., (SAI) reported the following securities December 31, 20X1:

Common shares 100,000 outstanding.

Preferred shares, $3 dividend, cumulative 30,000 shares outstanding. Each of these preferred shares are convertible into 4 common shares. Dividends on these shares are paid quarterly on March 31, June 30, September 30 and December 31.

6% $1,000 convertible bonds outstanding at par value, $3,000,000. The bonds are convertible into 60,000 common shares. Annual interest on the bonds is payable on December 31.

25,000 warrants, each entitling the holder to purchase 8 common shares of SAI at $16 each.

15,000 put options, each entitling the holder to sell 2 common shares of SAI at $17 each.

Additional Information for 20X2

The company had issued 50,800 common shares on March 1 under a takeover agreement wherein SAI bought all of the operating assets of Jet Corporation.

On April 1, some of the preferred shareholders exercised their conversion rights and the company issued 40,000 common shares to them.

On April 30, the company declared a 2:1 stock split for common shares. (Hint: All conversion and price variables are adjusted proportionately).

On May 1, the company repurchased 21,750 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 basic earnings per share of $1.204 in 20X2. The tax rate was 40%.

REQUIRED:

1. Determine the weighted average number of common shares to use in calculating the basic EPS.

2. Determine the amount of dividends declared and paid to the preferred shareholders during 20X2.

3. Calculate the amount of the net income and 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

December31, 20X2.

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.

5. Determine the diluted earnings per share to be reported by the company in 20X2.