Lexy Inc. is preparing its financial statements for the year ended December 31, 20X3. It is a

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Question:

Lexy Inc. is preparing its financial statements for the year ended December 31, 20X3. It is a publicly traded entity and therefore earnings per share must be calculated. Lexy had the following capital structure as at January 1, 20X3:

Number of shares issued and outstanding Common shares 800,000

Class A 3% cumulative preference shares with a par value of $150 each 50,000 outstanding

Class B non-cumulative preference shares with a stated annual dividend of $1.15 per share 30,000 outstanding

Class C cumulative preference shares with a stated annual dividend of $0.75 per share; each preference share can be converted into four common shares at the holder’s option 20,000 outstanding

Series A — $3,000,000 — 2% convertible bonds, interest is payable semi-annually, issued at par, and maturing December 31, 20X9. Each $1,000 bond can be converted into 50 common shares, at the holder’s option.

Series B — $2,000,000 — 4.5% convertible bonds, interest is payable semi-annually, issued at par, and maturing May 31, 20X8. Each $1,000 bond can be converted into 30 common shares, at the holder’s option.

Options T02 — 100,000 options with an exercise price of $15, expire on December 31, 20X5

Options T03 — 50,000 options with an exercise price of $25, expire on December 31, 20X9

During the year, Lexy had the following capital transactions:

• February 1, 20X3 — issued 100,000 common shares

• June 1, 20X3 — declared and distributed a three-for-one stock split

• November 1, 20X3 — repurchased 70,000 common shares

Additional information:

• After-tax profit for the year ended December 31, 20X3, was $3,200,000 and comprehensive income was $3,540,000.

• Lexy’s income tax rate is 30%.

• Dividends in the amount of $600,000 were declared and paid. Dividends were last declared and paid in 20X1.

• The average price per share during 20X3 was $22.00.

• The exercise prices and number of shares under the stock option plans as well as the conversion factors for the convertible bonds and preference shares have all been adjusted for the stock split.

Required:

a) Calculate Lexy’s basic EPS for the year ended December 31, 20X3. (2 marks)

b) Calculate Lexy’s diluted EPS for the year ended December 31, 20X3. (6 marks)