On January 1, 2017, Splish Company issued 10-year, $1,980,000 face value, 6% bon
ID: 2589305 • Letter: O
Question
On January 1, 2017, Splish Company issued 10-year, $1,980,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 15 shares of Splish common stock. Splish’s net income in 2017 was $304,000, and its tax rate was 40%. The company had 102,000 shares of common stock outstanding throughout 2017. None of the bonds were converted in 2017.
(a) Compute diluted earnings per share for 2017. (Round answer to 2 decimal places, e.g. $2.55.)
Diluted earnings per share:
(b) Compute diluted earnings per share for 2017, assuming the same facts as above, except that $1,020,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Splish common stock. (Round answer to 2 decimal places, e.g. $2.55.)
Diluted earnings per share:
Explanation / Answer
a. Computation of Diluted EPS.
Net income of the company if boonds are converted = Net Income + Interest savings on bonds net of Tax
= 304,000 + (1,980,000 x 6%) (1-40%) = $375,280
Number of shares outstanding = Total Shares + Convertible shares
Convertible shares = 1,980,000 / 1,000 x 15 = 29,700 shares
Number of outstanding shares = 102,000 + 29,700 = 131,700 shares
Diluted EPS of 2017 = $375,280 / 131,700 = $2.85 per share
B. Calculation of Diluted EPS under preferred Stock
Net income of the company if preferred stocks are converted = Net Income + Dividend saved on preferred stock
New Net Income = 304,000 + (1,020,000 x 6%) = $365,200
Note: Dividend on preferred stock is always paid after income tax and therefore it is not required to be calculated after tax.
New Outstanding Shares = 102,000 + (1,020,000 / 100 x 5) = 153,000 shares
Diluted EPS of 2017 = 365,200 / 153,000 = $2.39 per share