At December 31, 2016, Felix Ltd.had 500,000 common shares outstanding (no preferred shares issued).On October 1, 2017, an additional 100,000 common shares were issued.In addition, Felix had $5,000,000, 6% convertible bonds outstanding at December 31, 2016, which are convertible into 225,000 common shares; however, no bonds were converted during 2017.Net income for calendar 2017 was $1,500,000.Assuming the income tax rate was 30%, the diluted earnings per share for 2017 would be

Question

Quizplus · Accepted Answer

To calculate diluted EPS, first calculate basic EPS: Net income ($1,500,000) / Weighted average shares (500,000 + 25,000 for 3 months of 100,000 shares) = $2.82. For dilution, add shares from convertible bonds (225,000) and adjust net income for tax savings on bond interest ($5,000,000 * 6% * (1-0.30) = $210,000). Adjusted net income = $1,500,000 + $210,000 = $1,710,000. Diluted shares = 525,000 + 225,000 = 750,000. Diluted EPS = $1,710,000 / 750,000 = $2.28.