Task: Reel Envy Corporation
The Controller of Reel Envy (registered trademark) Corporation has given you the responsibility of calculating the earnings per share figures for the year ended 12-31-08. The information provided to you discloses the following:
1. Common stock at 1-1-08, stated value $2, authorized 5,000,000 shares; effective 10-1-08, stated value $1, authorized 10,000,000 shares.
- Balance, 1-1-08, issued and outstanding 500,000 shares
- 10-1-08, 500,000 shares issued in a 2 for 1 split
- 12-1-08, 480,000 shares issued at $52 per share
- 12-31-08, 750,000 shares issued to acquire Gold Reel Corporation in a business combination. Gold Reel had 1,500,000 shares outstanding for the entire year of 1908.
2. Treasury stock transactions:
3-31-08 purchased 50,000 shares at $110 per share
7-1-08 sold 50,000 shares at $115 per share.
3. Stock purchase warrants, Series A - initially each warrant was exchangeable with $100 for one common share; effective 10-1-08, each warrant became exchangeable for two common shares at $50 per share:
1-1-08, 55,000 warrants issued at $10 each.
4. Stock purchase warrants, Series B - initially each warrant was exchangeable with $125 for one common share; effective 10-1-08, each warrant became exchangeable for two common shares:
9-1-08, 40,000 warrants issued at $12 each.
5. First mortgage bonds, 8%, due 2030, nonconvertible, priced to yield 7.5% at date of issue:
Balance 1-1-08, authorized, issued and outstanding at a face value of $2,000,000.
6. Convertible debentures, 6%, due 2020, initially each $1,000 bond was convertible into 8 common shares; effective 10-1-08, the conversion rate became 16 shares per bond:
1-1-08, $2,000,000 bonds were authorized and issued at face value.
7. $4 cumulative convertible preferred stock, each share convertible into two shares of common, $40 par, 2,000,000 shares authorized:
10-1-08, 1,000,000 shares issued at $100 per share.
8. Stock options were granted to officers and key employees to purchase 110,000 shares of common stock at $48 per share, exercisable 1-1-10:
10-1-08 granted options to purchase 110,000 shares.
9. Summary of market prices and bank rates:
Price or Rate on a Date Yearly Average
1-1-08 4-1-08 7-1-08 10-1-08 12-31-08 12-31-08
Common Stock 100 110 115 52 60 55*
Preferred Stock 100 95 97
First Mortgage Bends 100.5 98 96 95 93 96
Convert Debentures 100 100 95 93 92 95
Series A 10 12 15 14 11 12
Series B 12 10 10.5
Aa Bond Rate 8 8.2 9.5 10 9.3
*Adjusted for stock split
Required:
Calculate the earnings per share assuming a net income of $3,500,700 for Reel Envy Corporation and $1,512,000 for Gold Reel Corporation. The effective tax rate for both corporations is 30%. Dividends paid to preferred stockholders in 2008 amounted to $250,000.