Question

Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,000,000 of 10% convertible bonds outstanding during 2011. The preferred stock is convertible into 40,000 shares of common stock. During 2011, Hanson paid dividends of $1.20 per share on the common stock and $4 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 2011 was $800,000 and the income tax rate was 30%.

Diluted earnings per share for 2011 is (rounded to the nearest penny)
a. $2.77.
b. $2.81.
c. $3.05.
d. $3.33.

Answer 1

The diluted earnings per share (EPS) for Hanson Co. in 2011, after accounting for the conversion of preferred stock and convertible bonds, and the adjustment for preferred dividends, is $2.53 per share.

Step-by-step explanation:

To calculate the diluted earnings per share (EPS) for Hanson Co. in 2011, we need to adjust the number of shares to include the potential conversion of preferred stock and convertible bonds into common stock. First, we calculate any adjustments for dividends on convertible preferred stock that would no longer be paid if they were converted into common stock. With a 30% income tax rate, we need to consider the tax savings from these dividends.

Preferred dividends not paid: 20,000 shares × $4 = $80,000. These dividends are not tax-deductible, so no tax savings are realized.

Net income available to common shareholders: $800,000 (net income) - $80,000 (preferred dividends) = $720,000.

The potential new common shares from conversion would be:

• Preferred stock: 20,000 shares × 2 (conversion ratio) = 40,000 shares.
• Bonds: ($1,000,000 / $1,000) × 45 (conversion ratio) = 45,000 shares.

So, the adjusted weighted-average number of common shares would be:

200,000 (original shares) + 40,000 (from preferred stock) + 45,000 (from bonds) = 285,000 shares.

Therefore, the diluted EPS for 2011 is:

$720,000 / 285,000 shares = $2.53 per share.