Questions #2 Basic and diluted earnings per share

The following data are presented by Quentin Corp. for calendar 2020

Net income $ 4,500,000

Common shares outstanding, 1,000,000 shares

10%, cumulative preferred shares, convertible into 120,000 common shares $ 1,600,000

8% convertible bonds; convertible into 105,000 common shares $ 7,500,000

360,000 call options exercisable at $ 25 per share

Additional information

1. The common and preferred shares and the convertible bonds were outstanding from the beginning of the year.

2. In 2020, a $ 500,000 dividend was declared and distributed; however, no dividends were declared in 2019.

3. The average market price of the common shares in 2020 was $ 30. The stock price was $ 27 on January 1, 2020, and $ 35 on December 31, 2020.

4. The convertible bonds were sold at par.

5. The income tax rate for 2020 is 30%.

Instructions

a) Calculate basic EPS.

b) Calculate diluted EPS.

c) Briefly discuss the usefulness of the EPS measure in general. What is the additional importance of reporting diluted EPS?