In this workout, we're asked to calculate the basic and fully diluted EPS. We're given information for net income. We're then given shares outstanding at the beginning of the period, and then we've got some things which may have a dilutive effect. Underneath that, the footnotes specify that the conversion rights embedded in the convertible debt entitle the holders to shares on a 1:1 basis. Okay, so what we need to do to work out our basic and our diluted EPS is we're going to need to adjust our earnings and then adjust the number of shares. I've already started my answer under here. Let's start by doing the adjusted earnings. We need to start off with that net income as given to us. That net income, up at the top, 22,870. We then ask what items may have had a dilutive effect and mean we need to adjust our earnings? When it's the convertible debt, if that converts into shares, then we won't need to pay interest on that at 5%. So, the net impact is going to be the 40,000 of debt times by the 5%, but we then get that after tax, so times by 1, minus the tax rate. I then multiply that by the number of months affected, and that affects all 12 months of the year, meaning we get to avoid 1400 of interest. That now means that my net income to common shareholders diluted is the sum of the two items above. Fantastic, it comes to 24,270. Next up, we move on to the number of shares. On January 1st, the start of the year, the number of shares we had was 200,000. As that number affects the whole rest of the year, the weighting is going to be 12 months out of 12 months. Change that to a percentage, it's 100%. Now, on July the 31st, new shares were issued of 50,000. How many months does that affect? It only affects the months thereafter, being August, September, October, November, December, so that only affects 5 months out of 12. Again, change it to a percentage, it affects 41.7% of the year. If I now take the number, multiply it by its weights, and then copy that down, we can now add up those two items and find that our basic WASO is 220,833.

We now move on to the converts. Now the convertibles, there was 40,000 of them, and we know that they convert on a 1:1 basis, so they're going to lead to 40,000 new shares. They're going to affect the whole of the year, so 12 months out of 12.

So their impact is going to be to increase the number of shares by 40,000, so my diluted WASO, diluted weighted average shares outstanding, is the basic plus the impact of the converts, getting me to 260,833.3. To finish up then, my basic EPS. That's going to be my original net income of 22,870. Divide that by the basic WASO. Both numbers did not include the impact of convertibles, which gets me to a figure of 0.10, if I show two decimal places. Now, the diluted EPS is slightly different. I now have net income to common shareholders diluted, which does include the fact that we've saved the interest, divide that by the diluted WASO, which does include the convertible debt converting into equity, and that gets me a figure of 0.09. So as expected, the diluted EPS is lower than the basic EPS.