Caltron Electronics has 3,000,000 common shares and 400,000 preferred shares outstanding. The preferred shares pay a dividend of $4.00 per share and are convertible into 800,000 common shares. During the year, Caltron earned net earnings of $9,800,000. The price/earnings ratio for the electronics industry is 12.5 times.
Required:
a. Calculate the basic earnings per share that should be reported in the financial statements.
b. Why is it important that the notes to the financial statements describe the preferred shares as convertible?
c. If Caltron purchased its own preferred shares on the market and cancelled them, what impact would this have on earnings per share in future years?
d. Estimate the market price of the common shares for Caltron at the end of the year.
e. What return are Caltron's shares earning, based on the earnings per share?
f. Lightning Electronics, a competitor of Caltron, reported earnings per share of $3.50 for the same period. Do you think Lightning is a better investment than Caltron? Explain your reasoning.