Question

Rudyard Corporation had 160,000 shares of common stock and 16,000 shares of 8%, $100 par convertible preferred stock outstanding during the year. Net income for the year was $520,000 and dividends were paid to both common and preferred shareholders. Rudyard's effective tax rate is 25%. Each share of preferred stock is convertible into five shares of common stock. What is Rudyard's diluted EPS (rounded)

Answer 1

Diluted EPS = $3.0625

Step-by-step explanation:

Earning per share (EPS) = earnings available to ordinary shareholders/ number of ordinary shares possible after conversion

Conversion of preferred stock into common stock

= 16,000 × 5 = 80,000

Number of ordinary shares = common stock + converted preferred stock

= 160000+ 80000 =240,000 units

$

Net Income 520,000

Preferred dividend (8%×100×16000) (128000)

Earnings available to shareholders 392000

Number of shares 240,000

Diluted Earnings per share

392,000/240,000= $3.0625

Diluted EPS = $3.0625