During 2016, Oddie 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. What is the amount of fully diluted earnings per share?

Question

Quizplus · Accepted Answer

To calculate fully diluted EPS, add the after-tax interest expense to net income and adjust the number of shares for conversion. Adjusted net income = $300,000 + $20,000 = $320,000. The bonds convert into 40,000 shares (200 shares x 200 bonds). Total shares = 400,000 + 40,000 = 440,000. Fully diluted EPS = $320,000 / 440,000 = $0.727.