FC reported earnings of $12,000,000.During the year FC issued a convertible bond that could be,if fully converted,increase FC's shares outstanding by 575,000.If FC currently has 4,800,000 shares outstanding and the after-tax cost of the convertible bonds is $850,000,what is FC's diluted EPS?

Question

Quizplus · Accepted Answer

To calculate diluted EPS, we have to take into account the potential additional shares that could be issued if all the convertible bonds were converted.

First, we need to calculate the potential number of additional shares:

575,000 convertible bonds x (1 convertible bond / 4 common shares) = 143,750 additional shares

Next, we need to add these potential shares to the current shares outstanding:

4,800,000 current shares + 143,750 potential shares = 4,943,750 diluted shares

Now we can calculate diluted EPS:

Diluted EPS = (Net income - Preferred dividends) / Diluted shares outstanding
Diluted EPS = ($12,000,000 - 0) / 4,943,750
Diluted EPS = $2.42

However, we also need to take into account the after-tax cost of the convertible bonds, which is $850,000. To do this, we need to adjust net income:

Adjusted net income = Net income - After-tax cost of convertible bonds
Adjusted net income = $12,000,000 - $850,000
Adjusted net income = $11,150,000

Finally, we can recalculate diluted EPS:

Diluted EPS = (Adjusted net income - Preferred dividends) / Diluted shares outstanding
Diluted EPS = ($11,150,000 - 0) / 4,943,750
Diluted EPS = $2.39

Therefore, the best choice is B) $2.39.

FC Reported Earnings of $12,000,000