For many years New York Studios has produced television shows and operated several FM radio stations. Throughout the current year, the company had 3 million shares of common stock and a large number of shares of convertible preferred stock outstanding. Earnings per share reported for the current year were as follows.

Instructions

a. Briefly explain why New York Studios reports diluted earnings per share amounts as well as basic earnings per share. What is the purpose of showing investors the diluted figures?

b. Assume that the price-earnings ratio shown in the morning newspaper for New York Studios€™s common stock indicates that the stock is selling at a price equal to 10 times the reported earnings per share. What is the approximate market price of the stock?

c. Assume that you expect both the revenue and expenses of the TV productions and the FM stations to increase by 10 percent during the coming year. What would you forecast as the company€™s basic earnings per share for the coming year under each of the following independent assumptions? (Show your computations and explain your reasoning.)

1. None of the convertible preferred stock is converted into common stock during the coming year.

2. All of the convertible preferred stock is converted into common stock at the beginning of the coming year.

Transcribed Image Text:

Dlluted Baslc Earnings per share: Net earnings ..... $6.90 $5.20 .....