During 2018, Mayfair Enterprises had the following securities outstanding: 1. 250,000 shares of common stock with an average market price of $25 per share. 2. 9.5% convertible preferred, which had been sold at its par value of $100. The preferred stock is convertible into three shares of common stock and 3,000 preferred shares are currently outstanding. During 2018, Mayfair Enterprises earned net income after income taxes of $3.2 million. Calculate the (a) basic earnings per share and (b) diluted earnings per share for Mayfair Enterprises for 2018.

To calculate the basic earnings per share (EPS) and diluted earnings per share for Mayfair Enterprises, we'll need to follow these steps:

Basic EPS: Basic EPS is calculated with the following formula: Basic EPS = (Net Income - Preferred Dividends) / Weighted Average Number of Common Shares Outstanding

a) First, we have to calculate the preferred dividends: The preferred stock percentage is 9.5%, with a par value of $100, and there are 3,000 preferred shares. So the annual preferred dividend per share is 9.5% of $100 = $9.50. The total preferred dividends paid out would be $9.50 * 3,000 shares = $28,500.

b) Now, let's calculate the basic EPS: The net income is given as $3.2 million, so we subtract the total preferred dividends from the net income: Net Income available for common shareholders = Net Income - Preferred Dividends = $3,200,000 - $28,500 = $3,171,500.

Given the number of common shares is 250,000, the basic EPS would be: Basic EPS = $3,171,500 / 250,000 shares = $12.686 per share.

Diluted EPS: Diluted EPS takes into account the effect of all potential dilutive common shares that could be exercised or converted into common stock within a period. In this case, we have to consider convertible preferred stocks.

To calculate diluted EPS, we follow these steps: 1. Calculate the impact of the convertible preferred stock. Convertible preferred stock can be converted into common stock. Therefore, we need to see the effect if all preferred stock is converted.

Since each preferred share is convertible into 3 shares of common stock, the conversion would potentially create an additional 3,000 shares * 3 = 9,000 common shares.

2. If the preferred shares were converted into common stock, there would be no dividends for preferred stock because they would have converted into common stock. Thus, the net income would not be reduced by the preferred dividends when calculating diluted EPS.

3. Adjust the weighted average number of common shares outstanding to reflect the conversion. The new share count would be the original 250,000 shares + the 9,000 shares from conversion = 259,000 shares.

Now let's calculate the diluted EPS with the adjusted share count: Diluted EPS = Net Income / (Weighted Average Number of Common Shares Outstanding + Shares from Conversion) Diluted EPS = $3,200,000 / 259,000 shares = approximately $12.355 per share.

Summary: a) Basic EPS = $12.686 per share. b) Diluted EPS = approximately $12.355 per share.