[Leecyp]

The income statement for Fignon Co for the year ended in Dec 31, 11 reported the following..
Income from continuting operation before taxes 35,000
Income taxes 14,000

Income from continuing operation 21,000
loss from disposal of segmant -4,200
Net Income 16,800

Compute basic EPS under the following assumptions

A. company has one class of common stock with 20,000 shares outstanding

B. company has shares outstanding as follows: preferred 8% stock, $15 par, cumulative, 5,000 shares; common, $12 par, 20,000 shares.

C. sames as B except company also has preferred 7% stock, $10 par, non cumulative, 6,000 shares and only $3,000 in dividends on the noncumulative preferred has been declared.

Below is my work so far, I am very lost and would appreciate any help please.

a NET INCOME 16,800 = 0.84
weighted Ave 20,000

b

5,000 * .08 = 400 PREFERRED
20,000 = 20,000 COMMON

NET INCOME 21,000 -400 = 1.03
weighted Ave 20000

c 5,000 * .08 = 400 PREFERRED
3,000 * .07 = 210 PREFERRED
20,000 COMMON

NET INCOME 21,000 - 400 -210 = 1.0195
weighted Ave 20000

[morgaine300]

a NET INCOME 16,800 = 0.84
weighted Ave 20,000

I don't know what they're calling "basic" EPS, but in reality you'd have to do an EPS for each of the sections of a statement: continuing operations, discontinued operations, and extraordinary item. The last two only if they exist of course. While an introduction to EPS may not make you do this, I have to imagine since the problem separated out the discontinued segment that they want this separation.

So for instance, you'd want to do one for the 21,000, and then another one for the (4200), which would be negative as well. When those are put together, they would equal the .84.

I would suggest looking at the following thread on this topic:
https://www.askmehelpdesk.com/accoun...fo-224643.html

The idea of separating the continuing ops from the discontinued segment still remains with the preferred stock, and I showed an example in that thread of how that works. So the following comments are only pertaining to how you came up with the preferred dividends themselves. You'll have to fix this and then give it a re-try with this additional info.

b

5,000 * .08 = 400 PREFERRED

This isn't how it works. The 8% doesn't mean 8% of the shares equals the amount of dividends they'd get. 8% of 5000, being 400, means 8% of the number of shares is 400 shares. It's doesn't mean 8% of the number of shares is 400 dollars. And you can't subtract shares from income.

I'm going to make a guess that you learned this: 5000 * 8% * $15 - and it really irks on me when it's taught that way. It works mathematically (when you remember to do the *$15 part), but that isn't really what it means, has no meaning as written, and doesn't allow people to understand what it actually does mean. And then makes people do like what you just did.

Doing 5000 * 8% * $15 is like saying 8% of the shares get dividends, and then they get $15 per each share. Which makes no sense. What it really means is 8% of the par is the amount each share will get. i.e. $15 * .08 = $1.20 of dividend per each share. And this will remain the case no matter how many shares exist. So at $1.20 each, * 5000 shares = $6000 total dividends the preferred shareholders get.

c 5,000 * .08 = 400 PREFERRED
3,000 * .07 = 210 PREFERRED

Ditto the issue of how you're doing this. But it's also inconsistent. The 5000 is the number of preferred shares. The 3000 dollars is not shares. So it's also inconsistent. You're just multiplying the same way, even though the 5000 and 3000 don't represent the same things. The $3000 is how much they've declared, period. If it were cumulative, you'd still have to calculate cause the rest would have to be made up somewhere down the line and would not be available to common stockholders. But the 2nd batch of preferred is non-cumulative and this won't happen. Only $3000 is paid, and nothing else ever paid. So there's simply nothing to calculate.

This is utilizing topics from what I suspect are from a different chapter - though perhaps it's another section of the same chapter. But there's stuff here about how dividends are done, which must be learned anyway, and has to be learned before you can deal with doing EPS. So make sure you ask anything you don't understand about this.