Question

At December 31, 2010, Emley Company had 1,200,000 shares of common stock outstanding. On September 1, 2011, an additional 400,000 shares of common stock were issued. In addition, Emley had $12,000,000 of 6% convertible bonds outstanding at December 31, 2010, which are convertible into 800,000 shares of common stock. No bonds were converted into common stock in 2011. The net income for the year ended December 31, 2011, was $4,500,000. Assuming the income tax rate was 30%, what should be the diluted earnings per share for the year ended December 31, 2011, rounded to the nearest penny?

a. $2.11
b. $3.38
c. $2.35
d. $2.45

Answer 1

To calculate the diluted earnings per share (EPS), we need to consider additional shares issued and convertible bonds. The diluted EPS for the year ended December 31, 2011, is $2.11 (rounded to the nearest penny).

Step-by-step explanation:

To calculate diluted earnings per share (EPS), we need to consider the additional shares issued and the convertible bonds. Let's calculate the diluted EPS step by step:

1. Calculate the weighted average number of shares from January 1, 2011, to September 1, 2011.
2. Add the additional shares issued on September 1, 2011, to the weighted average number of shares.
3. Calculate the potential dilution from the convertible bonds.
4. Convert the convertible bonds into common shares.
5. Add the converted shares to the weighted average number of shares.
6. Calculate the diluted earnings per share:

Weighted average number of shares = (1,200,000 x 8/12) + (400,000 x 4/12) = 1,200,000 + 133,333 = 1,333,333

Potential dilution from convertible bonds = 800,000

Diluted number of shares = 1,333,333 + 800,000 = 2,133,333

Diluted EPS = Net Income / Diluted Number of Shares = $4,500,000 / 2,133,333 = $2.11 (rounded to the nearest penny)