Question

Bonnie inc. has 500, 6%, $1,000 face amount bonds outstanding during the entire year. the bonds were issued at face. each bond is convertible into 14 shares of common stock. the company's tax rate is 30%. what would be the effect of the assumed conversion on the numerator of diluted eps?

a. $30,000
b. $21,000
c. $60,000

Answer 1

The effect of the assumed conversion on the numerator of diluted EPS can be calculated by considering the increase in the number of shares due to conversion and the decrease in interest expenses. Therefore, the correct answer is a. $30,000.

Step-by-step explanation:

The effect of the assumed conversion on the numerator of diluted EPS can be calculated by considering the increase in the number of shares due to conversion and the decrease in interest expenses.

The conversion of the bonds into shares will result in an increase in the number of shares outstanding. In this case, each bond is convertible into 14 shares of common stock, so if all the bonds are converted, the number of shares outstanding will increase by 14 * 500 = 7000.

At the same time, the assumption of conversion will also result in a decrease in interest expenses, as the interest payments on the bonds will no longer be required.

The pre-tax interest expense is calculated as 500 * $1,000 * 6% = $30,000. So, after the conversion, the effect on the numerator of diluted EPS would be a decrease of $30,000.

Therefore, the correct answer is a. $30,000.