Question I

Kampherz Company provided the following share information for the current year, 2005.

Event and Date Number of Shares

1/1 - Beginning balance 150,000

5/1 - New share issue 345,000

7/1 - Two-for-one stock split

8/1 - New share issue 300,000

12/1 - Treasury stock acquisition (120,000)

Kampherz reported a net income of $650,190 and a $450,000 loss from discontinued operations, net of tax. The company is subject to a 40% tax rate.

Additional Information

• Kampherz has $400,000, 3% convertible debt outstanding as of the beginning of the year. The debt was issued at par. Each $1,000 par value bond converts into 20 shares of the companys common stock. None of the bonds were converted during the year.

• The companys shareholders equity section indicates that the firm also holds 4% convertible preferred shares of par value $1,400,000, outstanding at the beginning of the current year. The preferred shares can convert into 40,000 shares of common stock.

• The dividends on preferred shares are declared four times a year on March 31, June 30, September 30 and December 31 respectively. These dividends are declared on shares outstanding on the date of the dividends. No dividends are declared on shares held for part of a dividend period. The board of directors declared the dividends as they became due.

• During the year, on October 1, 30% of the preferred shares exercised their option and converted into common shares.

• Kampherz had 18,000 put options outstanding all year. Each option offered the holder the right to sell one common share of Kampherz to the company at an exercise price of $8.00 per share. Assume the average market price (adjusted for the stock split) of the companys shares for the current year is $2.50 per share.

Required:

1. Determine the weighted average number of shares which are to be used in computing the diluted earnings per share.
2. Compute basic and diluted earnings per share for both income from continuing operations and net income. Show all computations.
3. Prepare all required disclosures beginning with income from continuing operations