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Mirrlees Corp. has $3,000,000 bonds convertible into 50 shares per $1,000 bond. Mirrlees has 1,000,000 outstanding...

Mirrlees Corp. has $3,000,000 bonds convertible into 50 shares per $1,000 bond. Mirrlees has 1,000,000 outstanding shares. Mirrlees has a tax rate of 40%. The average Aa bond yield at the time of issue was 10%. Compute the "diluted earnings per share" if after-tax earnings are $1,400,000.

$1.37

$1.25

$1.33

$1.40

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Answer #1

earnings per share earlier=1400000/1000000=1.40

Interest expense=3000000*10%=300000

Adjusted earnings if the bonds are converted in shares=((1400000/(1-40%))+300000)*(1-40%)

=1580000

new shares if the bonds are converted in shares=1000000+(3000000/10000)*50=1015000

adjusted earnings per share=1580000/1015000=1.56

as adjusted earnings per share of 1.56 is higher than earlier earnings per share of 1.40, so that means conversion of bonds to shares is anti dilutive

so diluted earnings per share=1.40

the above is answer..

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