Question
On January 2, 2018, Perez Co. issued at par $10,000 of 6% bonds convertible in total...
On January 2, 2018, Perez Co. issued at par $10,000 of 6% bonds convertible in total into 1,000 shares of Perez's common stock. No bonds were converted during 2018. Throughout 2018, Perez had 1,000 shares of common stock outstanding. Perez's 2018 net income was $4,500, and its income tax rate is 30%. No potentially dilutive securities other than the convertible bonds were outstanding during 2018. Perez's diluted earnings per share for 2018 would be (rounded to the nearest penny)
Select one:
a. $2.46.
b. none of the above.
c. $4.92.
d. $2.25.
e. $2.55.
Homework Answers
Answer #1
Answer
OPTION A i.e. $ 2.46
Calculations:
| A | Net Income | $ 4,500 |
| B | After tax interest (10,000 * 6%)(1-0.3) | $ 420 |
| C | Outstanding Shares | $ 1,000 |
| D | Convertible bonds | $ 1,000 |
| (A+B)/(C+D) | Diluted EPS | $ 2.46 |
Clearly, option a is correct and other options are incorrect.
In case of any doubt or clarification, you're welcome to come back via comments.
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