Final answer:
The diluted EPS for Mize Co. in 2011 is $3.20, calculated by adjusting the net income for bond interest net of taxes and dividing by the total shares, including those from potential bond conversions.
Step-by-step explanation:
The student's question is that the diluted earnings per share (EPS) for Mize Co. for the year 2011 would be $3.20.
To calculate diluted EPS, we begin by considering the impact of the convertible bonds on the total number of shares outstanding. Since the bonds are convertible into shares, we need to add the potential shares that could arise from the bond conversion. With $300,000 of 9% convertible bonds with each $1,000 bond being convertible into 30 shares, potential conversion would create an additional 9,000 shares (300 bonds x 30 shares). The total number of shares would then be the sum of the original shares plus the shares from conversion, which is 50,000 + 9,000 = 59,000 shares.
The next step is to calculate the net income to be used in the EPS calculation. The 9% interest on the convertible bonds must be added back to the net income after accounting for taxes, as the interest is a deductible expense. The interest on the $300,000 bonds is $27,000 (9% of $300,000). The tax saving on this interest is $27,000 * 30% = $8,100. Thus, the interest net of taxes to be added back is $27,000 - $8,100 = $18,900. Adjusted net income is $160,000 + $18,900 = $178,900.
Finally, diluted EPS is the adjusted net income divided by the adjusted number of shares: $178,900 / 59,000 shares = $3.03 (rounded to the nearest penny).