A company had 50,000 common shares and the following 3 convertible securities outstanding the entire year: 1.6%, $100 par cumulative preferred shares, 200 shares outstanding, each convertible int 5 common shares
2)200, 6% convertible bonds, face $1,000, each bond convertible into 40 common shares
3)2,000 stock options to purchase one common share each at $40.
The company earns interest at 6%.Its net income after tax income was $75,000.The tax rate is 40%.What is the diluted EPS (rounded to the nearest cent)?

Question

Quizplus · Accepted Answer

To calculate the diluted EPS, we first need to determine the impact of each convertible security on the earnings and the number of shares.1. Convertible preferred shares:- 200 shares, each convertible into 5 common shares, results in 1,000 additional common shares.- The preferred dividends that need to be added back to net income: 200 shares * $100 par * 1.6% = $320.2. Convertible bonds:- 200 bonds, each convertible into 40 common shares, results in 8,000 additional common shares.- Interest on bonds (needs to be added back to net income, net of tax): 200 bonds * $1,000 * 6% = $12,000; after tax: $12,000 * (1 - 0.40) = $7,200.3. Stock options:- 2,000 options, but we use the treasury stock method to calculate the impact. The exercise price is $40, so the company receives $40 for each option exercised. The total proceeds from exercising all options would be 2,000 * $40 = $80,000. This amount could be used to buy back shares at the average market price. However, without the average market price provided, we cannot directly calculate the exact number of shares that could be bought back. For the purpose of this calculation, we'll assume the impact of options is negligible or already factored into the net income and share count since we can't calculate it without the market price.Adding the adjustments to net income:- Adjusted net income = $75,000 (given net income) + $320 (preferred dividends) + $7,200 (interest on bonds, net of tax) = $82,520.Adjusted number of shares = 50,000 (original common shares) + 1,000 (from preferred shares) + 8,000 (from bonds) = 59,000 shares.Diluted EPS = Adjusted net income / Adjusted number of shares = $82,520 / 59,000 = $1.3986, rounded to the nearest cent is $1.39.

A Company Had 50,000 Common Shares and the Following 3