Question

At December 31, 2017, Zeus Company had 800,000 shares of common stock outstanding. On October 1, 2018, an additional 160,000 shares of common stock were issued. In addition, Zeus had $10,000,000 of 5% convertible bonds outstanding at December 31, 2017, which are convertible into 360,000 shares of common stock. No bonds were converted into common stock in 2018. The net income for the year ended December 31, 2018, was $2,500,000. Assuming the income tax rate was 30%, the diluted earnings per share for the year ended December 31, 2018, should be (rounded to the nearest penny)

Question 9 options:

	$2.08
	$2.38
	$2.50
	$3.39

Answer 1

Diluted Earning Per Share = (Net Income + After Tax Cost of Interest) ÷ (Weighted Average Shares Outstanding + Additional Shares Against Exercise of Convertible Bonds)

Where, Net Income = $2,500,000

After Tax Cost of Interest =

($10,000,000×5%) × (1-0.30) = $350,000

Weighted Average Shares Outstanding = 800,000 + (160,000×3/12) = 840,000

Additional Shares Against Exercise of Convertible Bonds = 360,000

Accordingly, putting these values in formula, we get

Diluted EPS = (2,500,000+350,000) ÷ (840,000+360,000) = 2.38

So correct answer is 2.38