Question

On January 2, 2019, Shank Co. issued at par $300,000 of 9% convertible bonds. Each $1,000 bond is convertible into 60 shares. No bonds were converted during 2019. Shank had 100,000 shares of common stock outstanding during 2019. Shank 's 2019 net income was $340,000 and the income tax rate was 30%. Shank's diluted earnings per share for 2019 would be (rounded to the nearest penny) Group of answer choices $3.04. $2.19. $3.26. $3.40. $2.29

Answer 1

Shank's diluted earnings per share for 2019 would be $3.04.

Step-by-step explanation:

This can be calculated as follows:

Amount of increase in net income if bonds are converted = Total value of convertible bonds * Bond rate * (100% - Tax rate) = $300,000 * 9% * (100% - 30%) = $18,900

Total earnings available to Equity Shareholders = Net income + Amount of increase in net income if bonds are converted = $340,000 + $18,900 = $358,900

Number of common shares obtainable from convertible bonds = (Total value of convertible bonds / $1,000) * 60 = ($300,000 / $1,000) * 60 = 18,000

Total number of shares outstanding = Number of shares of common stock outstanding during 2019 + Number of common shares obtainable from convertible bonds = 100,000 + 18,000 = 118,000

Diluted earnings per share = Total earnings available to Equity Shareholders / Total number of shares outstanding = $358,900 / 118,000 = 3.04