The following are selected details of Pizza Pie Inc.’s (PPI) capital structure as at January 1, 2021 and 2021 transactions:

Question 1 (20 marks)

PART A (12 marks)

The following are selected details of Pizza Pie Inc.’s (PPI) capital structure as at January 1, 2021 and 2021 transactions:

• As at January 1, 2021: 800,000 ordinary shares were issued; 750,000 were outstanding
• Bonds A – $1,000,000, eight-year, 5%, par-value bonds with interest payable semi-annually were sold on February 1, 2021. At the option of the holder, each $1,000 bond can be converted into eight ordinary shares at any time prior to maturity.
• Bonds B – $6,000,000, four-year, 6% bonds maturing December 31, 2022. At the time of issuance, these bonds were priced to yield 4.2% with interest payable semi-annually. PPI can call the bonds on July 1, 2022, at 102.
• 275,000, cumulative preferred shares “A” that are each entitled to dividends of $2 per annum.
• 100,000, $100 non-cumulative preferred shares “B” with a stated dividend rate of 2% per annum. At the option of the holder, each preferred share can be converted into three ordinary shares on December 31, 2022.
• Employee stock options – grants the holder the right to purchase 25,000 ordinary shares at any time before December 31, 2024, for $16 per share.
• Options A – were issued on November 1, 2021 and grants the holder the right to purchase 60,000 shares at any time before December 31, 2022, for $20 per share.

During the year PPI issued and redeemed ordinary shares as follows:

• March 1, 2021 – declared and issued a three-for-two stock split
• June 1, 2021 – sold 60,000 ordinary shares from treasury
• September 1, 2021 – repurchased 50,000 ordinary shares and held them as treasury shares
• October 1, 2021 – sold 95,000 ordinary shares from treasury
• November 1, 2021 – issued a 5% stock dividend

PPI is subject to a 25% tax rate. Its total comprehensive income for the year-ended December 31, 2021 was $5,275,000. Other comprehensive income for the year was $125,000 and PPI discontinued a division with a net loss of $1,010,000 for the year. In 2021, the average market price for PPI’s ordinary shares was $18 per share.

PPI declared and paid stated dividends on both classes of preferred shares in 2021, paid dividends in arrears on the cumulative preferred shares for 2020 and declared and paid $275,000 of dividends on its ordinary shares in 2021.

The recorded exercise prices and number of shares under the stock options plan that can be acquired have already been adjusted for the stock split. Similarly, the recorded conversion factors for the convertible bonds and preferred shares have already been adjusted for the stock split.

Required:

2021. Calculate basic EPS from each continuing operations, discontinued operations and operations for the year-ended December 31, 2021.
2022. Calculate diluted EPS from each continuing operations, discontinued operations and operations for the year-ended December 31, 2021.

• In order to maximize the potential points awards – be sure to include ALL relevant work performed