During 2014, Penny Co. had net income of $200,000 including after-tax interest expense of $30,000 on convertible bonds. The $300,000 face value of convertible bonds can be converted into common stock at the rate of 300 shares per $1,000 bond. Prior to the conversion, there were 400,000 shares of common stock outstanding. The fully diluted earnings per share is

Question

Quizplus · Accepted Answer

To calculate the diluted EPS, we need to determine the potential new shares that would be created from the conversion of the convertible bonds.

$300,000 face value of convertible bonds / $1,000 per bond = 300 bonds 
300 bonds x 300 shares per bond = 90,000 potential new common shares

Before the conversion, there were 400,000 shares outstanding. After the conversion, the total number of shares would be:

400,000 + 90,000 = 490,000 shares

To calculate the diluted EPS, we divide the net income by the total number of shares:

($200,000 - $30,000) / 490,000 shares = $0.469 EPS.

Therefore, the answer is B.