Question

How is diluted EPS caluclated, meaning how did the $560,000 come into play? The problem link is below.

https://www.chegg.com/homework-help/questions-and-answers/cougar-inc-two-potentially-dilutive-securities-income-continuing-operations-calendar-year--q40260203

Answer 1

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Cougar Inc.
Diluted EPS is calculated after converting all the potential debts to common stock if they are convertible in near future. Further expenses on those convertible debts are treated as income after giving tax effect.
Calculation of Diluted income:	Amount $	Amount $
Income from continuing operations		250,000.00
Income from discontinued operations		100,000.00
Interest saved on convertible bonds
$ 5,000,000 at 6%	300,000.00
Less: tax @ 40%	120,000.00
Net Interest saved		180,000.00
Diluted Income		530,000.00	A
Calculation of Diluted number of shares:
Weighted average common shares outstanding		100,000.00
6% bonds convertible into common stock		10,000.00
Diluted number of shares		110,000.00	B
Diluted EPS		4.82	C=A/B
Note: You mentioned $ 560,000 but that’s wrong. Diluted Income will be $ 530,000 and Diluted EPS will be $ 4.82.