During the current year, East Corporation had 2 million shares of common stock outstanding. Two thousand 8% convertible bonds, each with $1,000 face value, were issued at face amount at the beginning of the year. East reported income before tax of $3 million and net income of $1.8 million for the year. Each bond is convertible into 10 shares of common stock. What is diluted EPS (rounded)?
A) $0.90.
B) $0.95.
C) $0.89.
D) $0.94.

Question

Quizplus · Accepted Answer

Basic EPS: $\frac{\$ 1,800,000}{2,000,000}=\$ 0.90$ The incremental effect of the bonds is $4.80* which is more than the $0.90 basic EPS. The bonds are antidilutive and therefore would not be included in the calculation of diluted EPS. * $2,000,000 bonds × 8% = $160,000 interest. Net income is 60% of income before tx. $160,000 × 60% = $96,000 after-tax effect of interest. The bonds are convertible into 20,000 shares of stock. $96,000/20,000 shares = $4.80.

During the Current Year, East Corporation Had 2 Million Shares