Calculating Basic and Diluted EPS

The following are selected details of Muddy Water Inc.s capital structure as at January 1, 2018

1.200,000 ordinary shares issued and outstanding

2.100,000 cumulative preferred shares A that are each entitled to dividends of $4 per annum

3.50,000, $100 non-cumulative shares B with a stated dividend rate of 3% per annum. At the option of the holder, each preferred share can be converted into two ordinary shares on December 31, 2023

4.Bonds A - $1,000,000, 6% semi-annual bonds maturing December 31, 2022.

5.Bonds B - $2,000,000, 5%, semi-annual bonds maturing June 30, 2028. At the option of the holder, each $1,000 bond can be converted into 10 ordinary shares at any time between January 1, 2023, and December 31, 2023.

6.Bonds C - $500,000, 3%, semi-annual bonds maturing December 31, 2023. At the option of the holder, each $1,000 bond can be converted into eight ordinary shares.

7.Option A grants the holder the right to purchase 10,000 ordinary shares at any time before December 31, 2021, for $20 per share

8.Option B grants the holder the right to purchase 5,000 ordinary shares for $12 per share. The option expires on December 31, 2019.

During the year Muddy Water Inc. issued ordinary shares as follows:

• March 1, 2018 issued 20,000 ordinary shares
• October 1, 2018 issued 10,000 ordinary shares
• December 1,2018 declared and distributed a 20% stock dividend

Muddy Water Inc. was subject to a 30% tax rate. Its net income for the year ended December 31, 2018, totaled $1,339,000. During the year, Muddy Water declared and paid the stated dividends on both classes of preferred shares as well as $200,000 of dividends on its ordinary shares. The average market rate in 2018 for Muddy Waters ordinary shares was $15.

The recorded exercise prices, # of shares under the stock options and convertible bonds and preferred shares have already been adjusted for the stock dividend. Rate of interest on the bond equals the effective interest rate.

Date Jan1 - Feb 28 Mar1- Sept30 Oct1- Nov 30 Dec 1 -Dec 31	Activity	Share O/S	Adj. factor	Fraction of year	WASO (OS x fraction X Adj, Factors)
Weighted Average number of ordinary shares outstanding

	Calculation	Amount
Net Income		1,339,000
Less Preferred Dividends A
Less Preferred Dividends B
Net Income Available to ordinary shareholders
Basic EPS

Calculate Incremental EPS

Potential Ordinary shares	Income effect	Share Effect	Incremental EPS	Rank

Calculate Diluted Earnings Per Share

Income

Shares

Basic EPS

Provisional EPS

Diluted EPS