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At December 31, 2014, Emley Company had 1,200,000 shares of common stock outstanding. On October 1,...

At December 31, 2014, Emley Company had 1,200,000 shares of common stock outstanding. On October 1, 2015, an additional 400,000 shares of common stock were issued. In addition, Emley had $10,000,000 of 6% convertible bonds outstanding at December 31, 2014, which are convertible into 800,000 shares of common stock. No bonds were converted into common stock in 2015. The net income for the year ended December 31, 2015, was $3,750,000. Assuming the income tax rate was 30%, what should be the diluted earnings per share for the year ended December 31, 2015, rounded to the nearest penny?

A. $2.88

B. $1.99

C. $2.07

D. $1.59

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Expert Solution

correct option is "B"

weighted average common shares =[shares outstanding at beginning*period of outstanding] +[shares issued * period of outsanding]

                = [1200000*12/12]+ [400000*3/12]

              = 1200000+ 100000

             =   1300000shares

EPS = Net income/weighted average common shares

           = 3750000/1300000

             =$ 2.88 per share

Dilutive EPS = [net income +after tax interest on convertible bond ]/weighted average common shares after conversion

     =[3750000+420000]/2100000

       = 1.99 per share

since the EPS falls after bond conversion EPS is dilutive

**After tax interest = 10,000,000*.06*[1-.3] = 420000

weighted average common shares after conversion = 1300000+800000 = 2100000

ekkarill92 answered 1 year ago
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