What is Rudyard's diluted EPS (rounded)?
A)$2.13.
B)$2.67.
C)$3.20.
D)$4.80.

Question

Quizplus · Accepted Answer

To calculate diluted EPS, we need to add the impact of all potentially dilutive securities to the basic EPS.

Basic EPS = (Net income - Preferred dividends) / Weighted average number of common shares outstanding

= ($11,000,000 - $2,000,000) / 5,000,000

= $1.80

To calculate diluted EPS, we also need to factor in the impact of the convertible bonds and stock options.

Convertible bonds:

The bonds have a conversion ratio of 10:1, which means that for every bond, the holder can convert it into 10 common shares.

Number of potential shares from convertible bonds = 50,000 bonds * 10 = 500,000 shares

Adjusted net income = Net income + (Interest on convertible bonds * (1 - tax rate))

= $11,000,000 + ($500,000 * (1-0.4))

= $11,300,000

Diluted EPS (convertible bonds) = (Adjusted net income - Preferred dividends) / (Weighted average number of common shares outstanding + Potential shares from convertible bonds)

= ($11,300,000 - $2,000,000) / (5,000,000 + 500,000)

= $2.12

Stock options:

The options have an exercise price of $30 and the average market price of the stock is $50. This means that it is beneficial for the holders to exercise their options since they can buy a share for $30 and sell it on the market for $50, making a profit of $20 per share.

Number of shares from stock options = 100,000 options * ($50 - $30) = 2,000,000 shares

Adjusted net income = Net income - (Option expense * (1-tax rate))

= $11,000,000 - ($1,000,000 * (1-0.4))

= $10,400,000

Diluted EPS (stock options) = (Adjusted net income - Preferred dividends) / (Weighted average number of common shares outstanding + Potential shares from convertible bonds + Potential shares from stock options)

= ($10,400,000 - $2,000,000) / (5,000,000 + 500,000 + 2,000,000)

= $2.67

Therefore, the diluted EPS (rounded) is $2.67, which means that the best choice is B.

What Is Rudyard's Diluted EPS (Rounded)