Sassy Corporation had the following securities outstanding at its fiscal year end December 31, 20X7 Preferred Shares, cumulative, convertible, $1 25 dividend per quarter, no par Authorization limit 100,000 issued and outstanding 40,000 shares Issued this year on October 1, 20X7 Common Shares, no par authorized 5,000,000 shares issued and outstanding 600,000 shares 200,000 Options $11 exercise price each option allows for the purchase of one share 9 Convertible Bonds, par value $2,500,000 The bonds were issued this year on May 1, 20X7 Other information for 20X7 The tax rate is 38 No dividends were declared in 20X7 Interest expense was $216,000 on the 9 bonds The 9 convertible bonds are convertible at a rate of seven shares for each $100 bond 20X7 net income was $790,000 Options were outstanding all year to purchase 200,000 common shares at $11 per share The preferred shares are convertible into common shares at a rate of 9 commons for one preferred share Common shares traded for an average of $30 during the year No common shares were issued or retired during the year Required Calculate basic EPS for 20X7 (4 marks) Test each security for dilution State if each is dilutive or anti dilutive Show calculations for dilution testing If options are dilutive calculate and clearly state how many new shares would be issued (9 marks) Prepare a cascade worksheet to show the calculation of diluted EPS, beginning with basic EPS Clearly, a state whose EPS number is the dilutive EPS (5 marks)

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Posted on Apr 09, 2022

Sassy Corporation had the following securities outstanding at its fiscal year-end December 31, 20X7:

Preferred Shares, cumulative, convertible, $1.25 dividend per quarter, no-par. Authorization limit 100,000; issued and outstanding 40,000 shares. Issued this year on October 1, 20X7.

Common Shares, no par; authorized 5,000,000 shares; issued and outstanding 600,000 shares

200,000 Options: $11 exercise price; each option allows for the purchase of one share

9% Convertible Bonds, par value $2,500,000. The bonds were issued this year on May 1, 20X7.

Other information for 20X7:

The tax rate is 38%
No dividends were declared in 20X7.
Interest expense was $216,000 on the 9% bonds.
The 9% convertible bonds are convertible at a rate of seven shares for each $100 bond.
20X7 net income was $790,000.
Options were outstanding all year to purchase 200,000 common shares at $11 per share.
The preferred shares are convertible into common shares at a rate of 9 commons for one preferred share.
Common shares traded for an average of $30 during the year.
No common shares were issued or retired during the year.

Required:

Test each security for dilution. State if each is dilutive or anti-dilutive. Show calculations for dilution testing. If options are dilutive calculate and clearly state how many new shares would be issued. (9 marks)

Prepare a cascade worksheet to show the calculation of diluted EPS, beginning with basic EPS. Clearly, a state whose EPS number is the dilutive EPS. (5 marks)