Question

# Smile corp had 900,000 net income in 2018. The tax rate is 40%. 220,0000 shares of...

Smile corp had 900,000 net income in 2018. The tax rate is 40%. 220,0000 shares of common stock outstanding throughout 2018.

Smile corp had the following potentially dilutive securities.

-There are 30,000 options to buy common stock at 40 a share outstanding. The market price of the common stock averaged 50 during 2018.

. During 2018, there were 40,000 shares of Cumulative convertible 7% preferred stock outstanding. The preferred is \$100 par, pays \$3.50 a year dividend, and is convertible into three shares of common stock.

-Smile Corp issued \$1,800,000 of 8% convertible bonds at face value during 2017. Each \$1,000 bond is convertible into 30 shares of common stock.

Requirements:

Compute diluted earnings per share for 2018. Complete the schedule and show all computations.

 Security Net Income Adjustment Adjusted Net Income (a) Shares Adjustment Adjusted Shares (b) EPS = a/b Common Stock \$900,000.00 -\$140,000.00 \$760,000.00 220,000.00 0.00 220,000.00 \$3.45 Options \$760,000.00 220,000.00 6,000.00 226,000.00 \$3.36 Bond \$760,000.00 \$96,000.00 \$856,000.00 226,000.00 54,000.00 280,000.00 \$3.06 Preferred Stock \$856,000.00 \$140,000.00 \$996,000.00 280,000.00 120,000.00 400,000.00 \$2.49 Preferred Stock (\$3.50 x 40,000) \$140,000.00 Options = [(50 – 40) ÷ 50] × 30,000 6000 Bond Interest = \$2,000,000 × .08 × (1-40%) 96000 # of shares converted from bonds = \$1800000/\$1000 x 30 shares 54000 shares # of shares converted from preferred stock = 40,000 x 3 shares 120,000 shares

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