Question

Lerner 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, Lerner paid dividends of $.90 per share on the common stock and $3.00 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 2011 was $600,000 and the income tax rate was 30%.

Diluted earnings per share for 2011 is (rounded to the nearest penny)
a. $2.14.
b. $2.25.
c. $2.35.
d. $2.46.

Answer 1

To calculate diluted earnings per share for 2011, we need to consider the conversion of convertible securities into common stock. This includes the conversion of convertible preferred stock and convertible bonds. By adding the after-tax interest expense saved from the conversion of these securities to the net income and adjusting the weighted average number of shares, we can calculate the diluted earnings per share.

Step-by-step explanation:

The diluted earnings per share for 2011 can be calculated by considering the conversion of convertible securities into common stock.

First, we need to determine the impact of the convertible preferred stock. The preferred stock can be converted into 40,000 shares of common stock. Since a $3.00 dividend was paid per share of preferred stock, the total dividend paid on the preferred stock would be $3.00 * 20,000 shares = $60,000. To calculate the impact on diluted earnings per share, we need to add the after-tax interest expense saved from the convertible preferred stock conversion to the net income.

Next, we need to consider the impact of the convertible bonds. Each $1,000 bond can be converted into 45 shares of common stock. Therefore, the total number of shares that can be obtained from the conversion of convertible bonds would be $1,000,000 / $1,000 * 45 = 45,000 shares. To calculate the impact on diluted earnings per share, we need to add the after-tax interest expense saved from the convertible bond conversion to the net income.

Finally, we can calculate the diluted earnings per share by dividing the adjusted net income by the diluted weighted average number of shares. The diluted weighted average number of shares can be calculated by adding the increase in the number of common shares from the conversion of the preferred stock and convertible bonds to the weighted average number of common shares outstanding.

In this case, the adjusted net income would be $600,000 + the after-tax interest expense saved from the conversion of preferred stock + the after-tax interest expense saved from the conversion of convertible bonds. The diluted weighted average number of shares would be 200,000 shares + the increase in the number of shares from the conversion of preferred stock + the increase in the number of shares from the conversion of convertible bonds.