On January 2, 2015, Mize Co. issued at par $300,000 of 9% convertible bonds. Each $1,000 bond is convertible into 60 shares. No bonds were converted during 2015. Mize had 100,000 shares of common stock outstanding during 2015. Mize 's 2015 net income was $240,000 and the income tax rate was 30%. Mize's diluted earnings per share for 2015 would be (rounded to the nearest penny)

Question

Quizplus · Accepted Answer

To calculate diluted earnings per share (EPS) for a company with convertible bonds, we need to determine the potential impact of the conversion on the number of shares outstanding.

First, we need to calculate the potential number of shares that could be issued if all the bonds were converted:

$300,000 / $1,000 = 300 bonds
300 bonds x 60 shares per bond = 18,000 shares

Adding these potential shares to the 100,000 shares already outstanding gives us a total of 118,000 potential shares.

To calculate diluted EPS, we also need to adjust for the interest expense on the convertible bonds, net of tax. The annual interest on the bonds is:

$300,000 x 9% = $27,000

Net of tax at 30%, the after-tax interest expense is:

$27,000 x (1 - 0.30) = $18,900

We then add this after-tax interest expense to net income to get our diluted earnings:

$240,000 + $18,900 = $258,900

Finally, we divide diluted earnings by the potential number of shares to get diluted EPS:

$258,900 / 118,000 = $2.19

Therefore, the answer is B: $2.19.