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

On January 1, 2020, Pearl Company issued 10-year, $2,020,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 16 shares of Pearl common stock. Pearl’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 $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 $970,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Pearl 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

Solutions

Expert Solution

(a) Compute diluted earnings per share for 2020.

Net Income $475300

Add: Interest Savings (net of tax) [($2020000 * 6%) x (1-.20)] $96960

Adjusted Net Income $572260

$2,020,000 / 1,000= 2,020 bonds x 16 = 32320 shares

Diluted EPS: $572260 / (97000+32320) = $4.43

(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 Pearl common stock.

Outstanding Shares 97000

Add: Shares Assumed to be Issued (9700* x 5) 48500

Shares Outstanding Adjusted 145500

*970000/100

Diluted EPS: ($475300-0)/145500= $3.27

ekkarill92 answered 1 year ago

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