Peterborough's capital structure was as follows:
Dec. 31, 1995 Dec. 31, 1996
Outstanding shares of stock:
Common $110,000 $110,000
Convertible preferred $10,000 $10,000
8% convertible bonds $1,000,000 $1,000,000
During 1996, Peterborough paid dividends of $3.00 per share on its preferred stock. The preferred shares are convertible into 20,000 common shares and are considered common stock equivalents. The 8% bonds are convertible into 30,000 common shares but are not considered common stock equivalents. Net income for 1996 was $850,000. Assume that the income tax rate is 30%. The primary earnings per share for 1996 is ________.
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A. B. C. D. E.C
As common stock equivalent (CSE), the preferred stock must be considered in the calculation of primary earnings per share (PEPS) and assumed to have no preferred dividends paid. PEPS is then $6.54 ($850,000/ (110,000 + 20,000)).