Question

On January 2, 2021, L Co. issued at face value $26,000 of 4% bonds convertible in total into 2,200 shares of L's common stock. No bonds were converted during 2021. Throughout 2021, L had 2,200 shares of common stock outstanding. L's 2021 net income was $8,000. L's income tax rate is 25%. No potential common shares other than the convertible bonds were outstanding during 2021. L's diluted earnings per share for 2021 would be:

Answer 1

Diluted EPS = $ 2.4

Step-by-step explanation:

Diluted earnings per share (diluted EPS):

Diluted earnings per share is the earnings made on every share of a public company that is calculated assuming that all the securities that are convertible were duly exercised.

Formula:

Diluted EPS = (Net income + Interest after tax) / Total outstanding shares outstanding

As net income = $8000, Interest rate = 4%

and Interest(Before tax) = 26000 * 0.4 = $10400

so Interest after tax = 10400 * 0.25 = $2600

Now calculating total shares outstanding

Total shares outstanding = 2,200 + 2,200 = 4400 shares

Therefore by putting the values in the above formula, we get

Diluted EPS = ( 8000 + 2600 ) / 4400

Diluted EPS = 10600 / 4400

Diluted EPS = $ 2.4