Question

At December 31, 2016, Morrison Company had 700 shares of common stock outstanding. On September 1, 2017, an additional 300 shares of common stock were issued. In addition, Morrison had $20,000 of 8 percent convertible bonds outstanding at December 31, 2016, which are convertible into 400 shares of common stock. No bonds were converted into common stock in 2017. Net income for the year ended December 31, 2017, was $6,000. Assuming an income tax rate of 50 percent what would be the company’s diluted earnings per share for the year ended December 31, 2017?

Question 8 options:

a)

$7.50

b)

$5.00

c)

$5.67

d)

$4.33

Answer 1

The conversion of bonds would have eliminated the $20,000 * 8% = $1,600 in intrerest expense but would have increased taxes by $1,600 * 50% = $800, so the net savings (adjusted for taxes) is $1,600 - $800 = $800.

Earnings = $6,000 + $800 = $6,800

Weighted average shares = 700 + (300*4/12) = 800

Convertible preferred stock = 400

Shares = Weighted average shares + Convertible preferred stock

= 800 + 400

= 1,200

Diluted earnings per share = Earnings / Shares

= $6,800 / 1,200

= 5.67

The answer is C.