Question

On January 1, 2020, Flounder Company issued 10-year, $2,060,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 15 shares of Flounder common stock. Flounder’s net income in 2020 was $459,000, and its tax rate was 20%. The company had 108,000 shares of common stock outstanding throughout 2020. None of the bonds were converted in 2020.

(a) Compute diluted earnings per share for 2020. (Round answer to 2 decimal places, e.g. $2.55.)

Diluted earnings per share

$enter diluted earnings per share rounded to 2 decimal places

(b) Compute diluted earnings per share for 2020, assuming the same facts as above, except that $1,080,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Flounder common stock. (Round answer to 2 decimal places, e.g. $2.55.)

Diluted earnings per share

$enter diluted earnings per share rounded to 2 decimal places

Answer 1

(a)

Particulars ($)	Basic EPS	Diluted EPS
Net income	459000	459000
Less: Preferred Dividend	-	–
Add: After-tax cost of interest	–	=$2060000*6%*(1-20%) =98880
Numerator	459000	557880
Weighted average number of common shares outstanding	108000	108000
Additional shares issued if Bonds converted		=($2060000/$1000) * 15 share =30900
Denominator	108000	138900
EPS	4.25	4.02

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b

Particulars ($)	Basic EPS	Diluted EPS if converted
Net income	459000	459000
Less: Preferred Dividend	=$1080000*6% =64800	–
Numerator	394200	459000
Weighted average number of common shares outstanding	108000	108000
Additional shares issued if preferred shares converted	–	=$1080000/$100 * 5 share =54000
Denominator	108000	162000
EPS	3.65	2.83