The Heath Corporation reported net income for 2015 of $177,500. Heath began the year with 100,000 shares of $5 par value common shares outstanding and 2,500 shares of $100 par value 8% preferred shares outstanding. On October 1, Heath sold 10,000 shares of common stock for $6 per share. Heath paid dividends to the common shareholders in December.
-If each share of preferred stock is convertible into 2 shares of common stock,the diluted earnings per share for 2015 is

Question

Quizplus · Accepted Answer

To calculate diluted EPS, first calculate basic EPS: Net income ($177,500) minus preferred dividends (2,500 shares * $100 * 8% = $20,000) equals $157,500. Basic EPS = $157,500 / (100,000 + 10,000/4) = $1.50. For diluted EPS, assume conversion of preferred shares: 2,500 * 2 = 5,000 additional shares. Adjusted net income = $177,500 (no preferred dividends deducted). Diluted EPS = $177,500 / (100,000 + 2,500 * 2 + 2,500) = $3.85.

The Heath Corporation Reported Net Income for 2015 of $177,500