Question

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On January 1, 2020, Sweet Company issued 10-year, $2,020,000 face value, 6% bonds, at par. Each...

On January 1, 2020, Sweet Company issued 10-year, $2,020,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 16 shares of Sweet common stock. Sweet’s net income in 2020 was $475,300, and its tax rate was 20%. The company had 97,000 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

$.

(b) Compute diluted earnings per share for 2020, assuming the same facts as above, except that $970,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Sweet common stock. (Round answer to 2 decimal places, e.g. $2.55.)

Diluted earnings per share

$.

Expert Solution

Solution

a) Calculaton of Diluted Earning Per Share for 2020 :

Diluted Earning Per Share = Adjusted Income After Dilution / Total outstsanding Shares After Dilution

Here,

Adjusted Income After Dilution = Net Income + Interest Saving (Net of Tax)

= 475,300 + [ (2,020,000 * 6%) * (1-20%) ]

= 475,300 + 121,200*0.8

= 475,300 + 96,960

= $572,260

Total Outstanding Shares = Shares Outstanding During year + Diluted Shares

= 97,000 Shares + [($2,020,000 / $1000) * 16 Shares]

= 97,000 Shares + 32,320 Shares

= 129,320 Shares

Therefore,

Diluted EPS = $ 572,260 / 129,320 Shares

= $ 4.43

b)

Diluted Earning Per Share = Adjusted Income After Dilution / Total outstsanding Shares After Dilution

Here,

Adjusted Income After Dilution =$ 475,300 (As there is no Interest)

Total Outstanding Shares = Shares Outstanding During year + Diluted Shares

= 97,000 Shares + [($ 970,000 / $100) * 5 Shares]

= 97,000 Shares + 48,500 Shares

= 145,500 Shares

Therefore,

Diluted EPS = $ 475,300 / 145,500 Shares

= $ 3.27

ekkarill92 answered 2 years ago

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