Question

3-During the current year, East Corporation had 3 million shares of common stock outstanding. 2,600, 9% convertible bonds, each with $1,000 face value, were issued at face amount at the beginning of the year. East reported income before tax of $9 million and net income of $5.4 million for the year. Each bond is convertible into 10 shares of common stock. What is diluted EPS? (Round your answer to 2 decimal places. Do not round your intermediate calculations.)

Multiple Choice

• $1.84.

• $1.82.

• $1.78.

• $1.80.

Answer 1

(a)-Net Income
Net Income	5,400,000
Add: Interest expense after tax [(2,600 x 1,000 x 0.09) x (1 - 0.40)]	140,400
Total earnings available (a)		5,540,400
(b)-Total number of equity shares diluted
Number of common shares outstanding	3,000,000
Add: Number of bonds converted in to equity [2,600 x 10]	26,000
Total number of equity shares diluted (b)		3,026,000
Diluted EPS (a)/(b)		$1.84 per share

NOTE, Calculation of the Tax rate for the year

Tax rate = [($9,000,000 - $5,400,000) / $9,000,000] x 100

= [$3,600,000 / $9,000,000] x 100

= 40.00%