Question

On January 1, 2027, Ajax Corporation had 10 million shares of common stock, issued and outstanding. On October 1, 2027 Ajax issued an additional 1 million shares of common stock. Ajax also has $40 million face value, 6.25% convertible bonds outstanding for the entire year. The bonds are convertible into 2 million common shares. Ajax has a tax rate of 40% and net income of $14 million in 2027. What is Ajax’s diluted earnings per share for 2027?

Question 6 options:

	$1.35
	$1.37
	$1.27
	$1.22

Answer 1

Answer: $ 1.27

Diluted EPS workings:

Diluted EPS = Adjusted Net Income/Weighted average shares outstanding after dilution

Diluted EPS = $ 15,500,000/12,250,000 = $ 1.27

Weighted average shares outstanding(after dilution) = {(10,000,000) x 12/12} + {(1,000,000) x 3/12} + {(2,000,000) x 12/12} = 12,250,000 Shares

Adjusted Net Income

= Net Income + Interest on Convertible bonds - tax on Interest

= $ 14,000,000 + ($ 40,000,000 x 6.25%) - ($ 40,000,000 x 6.25% x 40%)

= $ 14,000,000 + $ 2,500,000 - $ 1,000,000

= $ 15,500,000

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