Reference no: EM132677855

Problem - Martinez Inc. had 503,000 common shares outstanding for the entire ?scal year ended August 31. 2020. Martinez has 103,000 outstanding $2 cumulative, no-par value preferred shares. All shares were outstanding for the full year. Options were written at the start of the ?scal year to purchase 31,000 common shares at $16 per share. The average market price of Martinez's common shares during the year ended August 31, 2020 was $25 per share. The options expire in 2029, and none were actually exercised during the current year. Also outstanding for the entire year was a 3% bond with a face value of $5,500,000, convertible to 125,000 common shares. Martinez Inc.'s net income for the year was $2,695,350 and the income tax rate for the fiscal year was 40%. (For simplicity, ignore the requirement to record the debt and equity portions of the convertible bond separately).

Required -

1. Calculate the income effect of the dividends on preferred shares.

2. Calculate Martinez Inc.'s basic earnings per share for the year ended August 31, 2020.

3. Calculate the after-tax interest paid on the 8% bonds.

4. Determine an incremental per share effect for 8% bonds.

5. Calculate the proceeds from assumed exercise of 31,000 options.

6. Calculate the incremental shares outstanding upon the exercise of options.

7. Rank the potentially dilutive securities from most dilutive to least dilutive.

8. Calculate Martinez Inc.'s diluted earnings per share for the year ended August 31, 2020.