Horne Engineering Corp.has 30,000 6.0% bonds convertible into 30 shares per $1,000 bond.Horne Engineering has 500,000 outstanding shares and a tax rate of 35%.Compute (basic)earnings per share if after-tax earnings are $750,000 and diluted EPS when bonds are converted.

Question

Quizplus · Accepted Answer

To calculate basic earnings per share, divide after-tax earnings by the number of outstanding shares:

Basic EPS = After-tax earnings / Outstanding shares
Basic EPS = $750,000 / 500,000
Basic EPS = $1.50

To calculate diluted earnings per share, we need to take into account the impact of converting the convertible bonds into shares. The formula for diluted EPS is:

Diluted EPS = (After-tax earnings + Convertible bond interest * (1 - tax rate)) / (Outstanding shares + (Convertible bonds / Conversion ratio))

First, we need to calculate the interest expense on the convertible bonds:

Convertible bond interest = 30,000 bonds * $1,000 * 6.0% = $1,800,000

Then, we can calculate the diluted EPS:

Diluted EPS = ($750,000 + ($1,800,000 * (1 - 0.35))) / (500,000 + (30,000 / 30))
Diluted EPS = $1,371,000 / 501,000
Diluted EPS = $2.73 / 2
Diluted EPS = $1.37

Therefore, the answer is B, $1.50 basic, $1.37 diluted.