I have to do this problem, and I am so confused. Please help if you know about stocks.

If I had 370,000 shares of $20 par common stock outstanding. January, 2,000, 8% bonds were issued with maturity value of $1,000 each. To have a better bond sale, I offer a conversion of 50 shares of common stock for each bond at option of purchaser. Net Income was $464,000. Income tax rate is 30%. Compute diluted earnings per share of common stock.

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Originally Posted by lynette1259

I have to do this problem, and I am so confused. Please help if you know about stocks.

If I had 370,000 shares of $20 par common stock outstanding. January, 2,000, 8% bonds were issued with maturity value of $1,000 each. To have a better bond sale, I offer a conversion of 50 shares of common stock for each bond at option of purchaser. Net Income was $464,000. Income tax rate is 30%. Compute diluted earnings per share of common stock.

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Basic EPS = Net Income / Total Shares = $464,000 / 370,000 shares = $1.25

Diluted EPS:

Bonds:
Numerator: Do not have to pay interest.

Pre tax Interest saved = 2,000 x $1,000 x 0.08 = $160,000

After Tax Interest saved = $160,000 x 0.70 = $112,000

Numerator = 464,000 + 112,000 = $576,000


Denominator:
Shares Added = 50 shares x 2,000 bonds = 100,000 shares

Denominator = 370,000 + 100,000 = 470,000 shares

Diluted EPS
Bonds = $576,000 / 470,000 shares = $1.23