Question 3 (8 marks)

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

Common shares 450,000 outstanding.

Preferred shares, $5, cumulative 135,000 shares outstanding. These shares were also convertible into 3 common shares for 1 preferred share. 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. The bonds are convertible into 270,000 common shares. Annual interest on the bonds is payable on December 31 and amounted to $810,000.

Additional Information for 2022

The company had issued 183,600 common shares on February 1 under a takeover agreement wherein RedTek bought all the operating assets of GreenTek Corporation.

On April 1, some of the preferred shareholders exercised their conversion rights and the company issued 135,000 common shares to them.

On May 1, the company repurchased 134,325 common shares in the market and cancelled them.

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

The company determined the weighted average number of common shares required to compute the basic earnings per share for the current year to be 630,000 shares. It further reported the basic earnings per share for 2022 to be $1.99. There were no extraordinary or discontinued items to report in 2022. The tax rate was 40%.

Required:

Show how RedTek determined the WACS to be 630,000 for 2022. Was this correct?

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

3.. Calculate the amount of the net income, and the 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.

5. Determine the diluted earnings per share to be reported by the company in 2022.