During the current year, East Corporation had 2 million shares of common stock outstanding. Two thousand $1,000, 8% convertible bonds were issued at face amount at the beginning of the year. East reported income before tax of $3 million and net income of $1.8 million for the year. Each bond is convertible into 10 shares of common stock. What is diluted EPS (rounded)?
A)$.90.
B)$.95.
C)$.89.
D)$.94.

Question

Quizplus · Accepted Answer

To calculate diluted EPS, first calculate basic EPS: Net income ($1.8 million) / Shares outstanding (2 million) = $0.90. For dilution, consider the convertible bonds: 2,000 bonds x 10 shares = 20,000 additional shares. Adjust net income for tax savings on bond interest: $160,000 (interest) x (1 - tax rate). Assuming a 40% tax rate, tax savings = $96,000. Adjusted net income = $1.8 million + $96,000 = $1.896 million. Diluted EPS = $1.896 million / (2 million + 20,000) = $0.94.

During the Current Year, East Corporation Had 2 Million Shares