Asked by Sarah Randolph on Jun 25, 2024
Verified
During 2010, Omni Corp.had net income of $300, 000.Included in net income was after-tax interest expense of $20, 000 on convertible bonds.The $200, 000 face value of convertible bonds can be converted into common stock at the rate of 200 shares per $1, 000 bond.Prior to the conversion, there were 400, 000 shares of common stock outstanding.The fully diluted earnings per share is
A) $0.636
B) $0.727
C) $0.750
D) not determinable because the bonds are not dilutive
Convertible Bonds
Bonds that can be converted into a predetermined number of the issuing company's shares at certain times during the bond's life, usually at the discretion of the bondholder.
Diluted Earnings Per Share
A metric that calculates a company's earnings per share (EPS) if all convertible securities were converted into common stock, often resulting in a lower EPS.
- Comprehend the influence of calculating diluted EPS, focusing on the handling of convertible securities and options.
Verified Answer
EA
Emmanuel AniemekeJun 28, 2024
Final Answer :
B
Explanation :
To calculate the fully diluted earnings per share, we need to add the potential shares that would be created if the convertible bonds were converted.
Number of shares from convertible bonds = ($200,000 / $1,000) x 200 = 40,000 shares
Total number of shares after conversion = 400,000 + 40,000 = 440,000 shares
Adjusted net income = Net income + (after-tax interest expense x (1 - tax rate))
= $300,000 + ($20,000 x (1 - 0.35)) = $313,000
Fully diluted earnings per share = Adjusted net income / Total number of shares after conversion
= $313,000 / 440,000 shares = $0.7123 or $0.727 (rounded to nearest cent)
Therefore, the best choice is B, $0.727.
Number of shares from convertible bonds = ($200,000 / $1,000) x 200 = 40,000 shares
Total number of shares after conversion = 400,000 + 40,000 = 440,000 shares
Adjusted net income = Net income + (after-tax interest expense x (1 - tax rate))
= $300,000 + ($20,000 x (1 - 0.35)) = $313,000
Fully diluted earnings per share = Adjusted net income / Total number of shares after conversion
= $313,000 / 440,000 shares = $0.7123 or $0.727 (rounded to nearest cent)
Therefore, the best choice is B, $0.727.
Learning Objectives
- Comprehend the influence of calculating diluted EPS, focusing on the handling of convertible securities and options.
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