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Garfun, Inc., owns all of the stock of Simon, Inc. For 2018, Garfun reports income (exclusive...

Garfun, Inc., owns all of the stock of Simon, Inc. For 2018, Garfun reports income (exclusive of any investment income) of $480,000. Garfun has 80,000 shares of common stock outstanding. It also has 5,000 shares of preferred stock outstanding that pay a dividend of $15,000 per year. Simon reports net income of $290,000 for the period with 80,000 shares of common stock outstanding. Simon also has a liability for 10,000 of $100 bonds that pay annual interest of $8 per bond. Each of these bonds can be converted into three shares of common stock. Garfun owns none of these bonds. Assume a tax rate of 30 percent. What amount should Garfun report as diluted earnings per share? (Round your intermediate percentage value to the nearest whole number and the final answer to 2 decimal places.)

Diluted earnings per share=

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Expert Solution

Garfun Inc.
Figures for Simon's diluted EPS:
Net income 290000
Interest (net of tax) saved from assumed conversion 56000
Earnings for diluted earnings per share 346000
Shares outstanding 80000
Assumed conversion of bonds 30000
Subsidiary shares for parent’s share of diluted earnings 110000
Interest = 10000 x 100 x 8% x ( 1 - 0.3) = 56000
Shares controlled by Garfun = 80,000 ÷ 110,000 = 73% (rounded)
Income to be included in parent’s diluted EPS = $346,000 × 73% = $252,580
10000 bonds x 3 = 30000
Earnings for parent’s diluted earnings per share:
Net income—Garfun 480000
Dividends to Garfun's preferred stock -15000
Net Income included from Simon (above) 252580
Earnings for diluted EPS 717580
PARENT’S DILUTED EARNINGS PER SHARE = $717,580 ÷ 80,000 = $8.97

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