Question

During the current year, He Corporation had 3 million shares of common stock outstanding. $5,000,000 of 6% convertible bonds were issued at face amount at the beginning of the year. He Corporation reported income before tax of $4 million and net income of $3 million for the year. The bonds are convertible into 625,000 shares of common. What is diluted EPS (rounded)?

Answer 1

$0.83 per share

Step-by-step explanation:

Number of common stock = 3,000,000

Diluted shares = Number of shares convertible from bond to common stock = 625,000

Total number of shares to use for diluted earning per share (EPS) = 3,000,000 + 625,000 = 3,625,000

Diluted EPS = Net income ÷ Total number of shares for diluted EPS = $3,000,000 ÷ 3,625,000 = $0.83 per share.

Answer 2

Diluted EPS is $0.89

Step-by-step explanation:

diluted EPS=net income +(after tax interest on bonds)/(number of common stock+convertible shares)

tax rate=tax paid/net income before tax

tax paid=$4000,000-$3000,000

=$1000,000

net income before tax is $4,000,000

tax rate=1000000/4000000

=25%

after tax interest on bonds=$5,000,000*6%*(1-0.25)

=$225,000

diluted EPS=($3000,000+$225,000)/(3000000+625000)

=0.889655172

Approximately $0.89