In: Accounting
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
(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