During 2010, Omni Corp.had net income of $300, 000.Included in net income was after-tax interest expense of $20, 000 on convertible bonds.The $200, 000 face value of convertible bonds can be converted into common stock at the rate of 200 shares per $1, 000 bond.Prior to the conversion, there were 400, 000 shares of common stock outstanding.The fully diluted earnings per share is

Question

Quizplus · Accepted Answer

To calculate the fully diluted earnings per share, we need to add the potential shares that would be created if the convertible bonds were converted.

Number of shares from convertible bonds = ($200,000 / $1,000) x 200 = 40,000 shares

Total number of shares after conversion = 400,000 + 40,000 = 440,000 shares

Adjusted net income = Net income + (after-tax interest expense x (1 - tax rate))
= $300,000 + ($20,000 x (1 - 0.35)) = $313,000

Fully diluted earnings per share = Adjusted net income / Total number of shares after conversion
= $313,000 / 440,000 shares = $0.7123 or $0.727 (rounded to nearest cent)

Therefore, the best choice is B, $0.727.