Vickrey Technology has had net income of $1,500,000 in the current fiscal year. There are 1,000,000 shares of common stock outstanding along with convertible bonds, which have a total face value of $8 million. The $8 million is represented by 5,000 different $1,000 bonds. Each $1,000 bond pays 4% interest. The conversion ratio is 30. The firm is in a 30% tax bracket. What is Vickrey's "diluted earnings per share?"
A)$1.43
B)$1.81
C)$2.00
D)None of these options

Question

Quizplus · Accepted Answer

To calculate diluted EPS, first find the interest saved if bonds are converted: $8,000,000 * 4% = $320,000. After-tax savings: $320,000 * (1 - 0.30) = $224,000. Add this to net income: $1,500,000 + $224,000 = $1,724,000. Calculate new shares from conversion: 5,000 bonds * 30 shares/bond = 150,000 shares. Total shares = 1,000,000 + 150,000 = 1,150,000. Diluted EPS = $1,724,000 / 1,150,000 = $1.43.

Vickrey Technology Has Had Net Income of $1,500,000 in the Current