Question

# On January 1, 2017, Vaughn Company issued 10-year, \$2,150,000 face value, 6% bonds, at par. Each...

On January 1, 2017, Vaughn Company issued 10-year, \$2,150,000 face value, 6% bonds, at par. Each \$1,000 bond is convertible into 16 shares of Vaughn common stock. Vaughn’s net income in 2017 was \$305,000, and its tax rate was 40%. The company had 97,000 shares of common stock outstanding throughout 2017. None of the bonds were converted in 2017. (a) Compute diluted earnings per share for 2017. (Round answer to 2 decimal places, e.g. \$2.55.) Diluted earnings per share \$ (b) Compute diluted earnings per share for 2017, assuming the same facts as above, except that \$970,000 of 6% convertible preferred stock was issued instead of the bonds. Each \$100 preferred share is convertible into 5 shares of Vaughn common stock. (Round answer to 2 decimal places, e.g. \$2.55.) Diluted earnings per share \$

SOLUTION

(A) Net Income

 Amount (\$) Net Income 305,000 Add: Interest Savings (net of tax) [122,000 * (1-0.40)] 73,200 Adjusted Net Income 378,200

Shares - \$2,150,000 / 1,000 = 2,150 bonds * 16 = 34,400

Weighted average shares = 97,000 shares + 34,400 shares = 131,400

Diluted EPS = Net Income / Weighted average no. of shares outstanding

= \$378,200 / 131,400 = \$2.88

(B)

 Shares outstanding Outstanding Shares 97,000 Add: Shares Assumed to be Issued (9,700 * 5) 48,500 Shares Outstanding Adjusted 145,500

Diluted EPS = \$305,000 / 145,500 = \$2.09

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