Angel will report $6.5 as diluted earnings per share for 2018. Therefore, the Option B is correct as none of the option is correct.
Basic earning per share = Earning available to equity shareholders / Total no. of equity shares
= (Net income - Dividend paid to preferred shareholders) / Total no. of equity shares
= ($6,000,000 - $150,000) / 900,000
= $5,850,000 / 900,000
= $6.5
Number of converted bonds in to shares :
= 2,000,000 * (5 / 1000)
= 10,000 shares
Interest on debt:
= $2,000,000 * 0.05
= $100,000
After tax interest :
= $100,000*(1 - 0.20)
= $100,000*0.8
= $80,000
Diluted earning per share = [Net income + increase in interest (after tax)-preferred dividend] / [Weighted average common shares + converted shares]
= [6,000,000 + 80,000 - 150,000] / [900,000+10,000]
= 5,930,000 / 910,000
= $6.5 per share
The full question is:
During 2018, Angel Corporation had 900,000 shares of common stock and 50,000 shares of 6% preferred stock outstanding. The preferred stock does not have cumulative or convertible features. Angel declared and paid cash dividends of $300,000 and $150,000 to common and preferred shareholders, respectively, during 2018.
On January 1, 2017, Angel issued $2,000,000 of convertible 5% bonds at face value. Each $1,000 bond is convertible into five common shares.
Angel's net income for the year ended December 31, 2018, was $6 million. The income tax rate is 20%.
What will Angel report as diluted earnings per share for 2018, rounded to the nearest cent?
Multiple Choice
$6.43.
None of these answer choices are correct.
$6.22.
$6.25.