At December 31, 2014, Emley Company had 1,200,000 shares of common stock outstanding. On October 1, 2015, an additional 400,000 shares of common stock were issued. In addition, Emley had $10,000,000 of 6% convertible bonds outstanding at December 31, 2014, which are convertible into 800,000 shares of common stock. No bonds were converted into common stock in 2015. The net income for the year ended December 31, 2015, was $3,750,000. Assuming the income tax rate was 30%, what should be the diluted earnings per share for the year ended December 31, 2015, rounded to the nearest penny?

Question

Quizplus · Accepted Answer

To calculate the diluted earnings per share, we need to consider the effect of the convertible bonds.

Convertible bonds can be converted into a certain number of common shares. So, in this case, we need to add the potential shares that could be issued if all the bonds were converted.

Number of shares outstanding at Dec 31, 2014 = 1,200,000
Additional shares issued on Oct 1, 2015 = 400,000
Total shares outstanding = 1,600,000

Convertible bonds can be converted into 800,000 shares of common stock. Assuming all bonds are converted, the number of additional shares issued would be:

800,000 / 1 = 800,000

So, the diluted number of shares would be:

1,600,000 + 800,000 = 2,400,000

Now, we can calculate the diluted earnings per share:

Diluted earnings per share = (Net income - Preferred dividends) / Diluted number of shares

There are no preferred dividends, so we can use the net income.

Diluted earnings per share = ($3,750,000 x (1-0.30)) / 2,400,000
Diluted earnings per share = $2.625 / share

Rounded to the nearest penny, the answer is $1.99.

At December 31, 2014, Emley Company Had 1,200,000 Shares of Common