Number of average common shares:

1/1 5,500 shares issued (includes 10% stock dividend on 6/1) × 12 = 66,000

7/1 1,000 shares repurchased × 6 months = -6,000

= 60,000

60,000 shares / 12 months = 5,000 average shares

Preferred dividends = ($10)(1,000) = $10,000

Number of shares from the conversion of the preferred shares = (1,000 preferred shares)(8 shares of common/share of preferred) = 8,000 common

Diluted EPS = [$15,000(NI) − $10,000(pfd) + $10,000(pfd)] / 5000(common shares) + 8000(shares from the conv. pfd. shares) = $15,000 / 13,000 shares = $1.15/share

This number needs to be compared to basic EPS to see if the preferred shares are antidilutive.

Basic EPS = [$15,000(NI) − $10,000(preferred dividends)] / 5,000 shares = $5,000 / 5,000 shares = $1/share

Since the EPS after the conversion of the preferred shares is greater than before the conversion the preferred shares are antidilutive and they should not be treated as common in computing diluted EPS. Therefore diluted EPS is the same as basic EPS or $1/share.