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 into 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

The diluted EPS is calculated by considering the potential conversion of convertible securities into common shares. The preferred shares and bonds are convertible, and the stock options are exercisable. The preferred shares convert into 1,000 common shares (200 shares * 5), and the bonds convert into 8,000 common shares (200 bonds * 40). The stock options are not included as they are out of the money (exercise price $40 > market price implied by EPS choices). The adjusted net income is $75,000 + $7,200 (interest saved on bonds after tax) = $82,200. The total diluted shares are 50,000 + 1,000 + 8,000 = 59,000. Diluted EPS = $82,200 / 59,000 = $1.39.

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