Question

On January 2, 2011, Worth Co. issued at par $2,000,000 of 7% convertible bonds. Each $1,000 bond is convertible into 10 shares of common stock. No bonds were converted during 2011. Worth had 200,000 shares of common stock outstanding during 2011. Worth's 2011 net income was $600,000 and the income tax rate was 30%. Worth's diluted earnings per share for 2011 would be (rounded to the nearest penny):

a. $3.49.
b. $3.17.
c. $3.00.
d. $3.36.

Answer 1

The diluted earnings per share for Worth Co. in 2011 can be calculated by considering the impact of the convertible bonds. No bonds were converted in 2011, so the diluted shares outstanding is the sum of the common shares outstanding and the potential conversion of the bonds.

Step-by-step explanation:

The diluted earnings per share for Worth Co. in 2011 can be calculated by considering the impact of the convertible bonds. Since no bonds were converted, we can assume that the diluted shares outstanding is the sum of the common shares outstanding and the potential conversion of the bonds.

In this case, the number of diluted shares is 200,000 common shares plus 10 shares per $1,000 bond multiplied by the total face value of the bonds ($2,000,000) divided by $1,000. This gives us 200,000 + (10 * 2,000) = 220,000 diluted shares.

To calculate the diluted earnings per share, we need to adjust the net income for the potential conversion of the bonds. The net income of $600,000 is multiplied by (1 - tax rate) to get the after-tax amount, which is $600,000 * (1 - 0.30) = $420,000.

Then, the after-tax income is divided by the diluted shares to get the diluted earnings per share, which is $420,000 / 220,000 = $1.91.