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14 March, 15:09

Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,500,000 of 5% convertible bonds outstanding during 2018. The preferred stock is convertible into 40,000 shares of common stock. During 2015, Hanson paid dividends of $.90 per share on the common stock and $3 per share on the preferred stock. Each $1,000 bond is convertible into 30 shares of common stock. The net income for 2018 was $600,000 and the income tax rate was 30%. Reference: Ref 16-5 Diluted earnings per share for 2018 is (rounded to the nearest penny) Group of answer choices

a. $2.29.

b. $2.12.

c. $2.08.

d. $2.50.

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  1. 14 March, 16:21
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    Option (a) is correct.

    Explanation:

    Convertible preferred stock:

    Numerator effect = 20,000 shares * $3

    = $60,000

    Denominator effect = 40,000 shares

    Overall effect = $60,000 : 40,000

    = $1.50

    Convertible bonds:

    Numerator effect = $1,500,000 * 5% * (1 - 0.30)

    = $52,500

    Denominator effect = ($1,500,000 : $1,000) bonds * 30 shares

    = 45,000 shares

    Overall effect = $52,500 : 45,000

    = $1.17

    Tentative diluted EPS with only convertible bonds effect:

    = [$600,000 - (20,000 * $3) + $52,500] : (200,000 + 45,000)

    = $592,500 : 245,000

    = $2.42

    Effect of convertible preferred:

    = [$592,500 + $60,000] : (245,000 + 40,000)

    = $2.29
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