Question

On January 1, 2020, Shamrock Company issued 10-year, $1,880,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 16 shares of Shamrock common stock. Shamrock’s net income in 2020 was $391,300, and its tax rate was 20%. The company had 91,000 shares of common stock outstanding throughout 2020. None of the bonds were converted in 2020.

(a) Compute diluted earnings per share for 2020. (Round answer to 2 decimal places, e.g. $2.55.)

Diluted earnings per share

$enter diluted earnings per share rounded to 2 decimal places

(b) Compute diluted earnings per share for 2020, assuming the same facts as above, except that $910,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Shamrock common stock. (Round answer to 2 decimal places, e.g. $2.55.)

Diluted earnings per share

$enter diluted earnings per share rounded to 2 decimal places

Answer 1

(a)
	Net income	$391,300
	Add: Interest net of tax	$90,240	(1880000*6%*80%)
		$481,540
	No. of shares	91,000
	Add: conversion	30,080	(1880000/1000*16)
		121,080
	Diluted EPS	$3.98	(481540/121080)
(b)
	Net income	$391,300
	Add: Preference dividend	$0
		$391,300
	No. of shares	91,000
	Add: conversion	45,500	(910000/100*5)
		136,500
	Diluted EPS	$2.87	(391,300/136500)