Question

Information concerning the capital structure of Piper Corporation is as follows:

December 31,
2011 2010
Common stock 150,000 shares 150,000 shares
Convertible preferred stock 15,000 shares 15,000 shares
9% convertible bonds $2,400,000 $2,400,000
During 2011, Piper paid dividends of $1.20 per share on its common stock and $3.00 per share on its preferred stock. The preferred stock is convertible into 30,000 shares of common stock. The 9% convertible bonds are convertible into 75,000 shares of common stock. The net income for the year ended December 31, 2011, was $600,000. Assume that 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. $3.20
b. $2.95
c. $2.83
d. $2.35

Answer 1

The diluted earnings per share for Piper Corporation for the year ended December 31, 2011, is $2.95 (rounded to the nearest penny).

Step-by-step explanation:

To calculate the diluted earnings per share for Piper Corporation, we need to consider the convertible preferred stock and the 9% convertible bonds. The net income for the year ended December 31, 2011, was $600,000. We will adjust this net income for the effect of the convertible securities.

First, we calculate the impact of the convertible preferred stock. The preferred stock is convertible into 30,000 shares of common stock. So, we multiply the number of convertible preferred shares by the conversion rate and subtract any dividends paid on the preferred stock: 15,000 x (30,000/15,000) - (15,000 x $3.00) = 30,000 - $45,000 = -$15,000.

Next, we calculate the impact of the 9% convertible bonds. The bonds are convertible into 75,000 shares of common stock. So, we multiply the number of convertible bonds by the conversion rate and subtract any interest expenses related to the bonds: $2,400,000 x (75,000/2,400,000) - ($2,400,000 x 9%) = $75,000 - $216,000 = -$141,000.

To calculate the diluted earnings per share, we subtract the negative impact of the convertible securities from the net income and divide by the total number of shares:

Diluted earnings per share = ($600,000 - (-$15,000) - (-$141,000)) / (150,000 + 30,000 + 75,000) = $2.95 (rounded to the nearest penny).