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4 January, 12:39

During the current year, He Corporation had 3 million shares of common stock outstanding. $5,000,000 of 6% convertible bonds were issued at face amount at the beginning of the year. He Corporation reported income before tax of $4 million and net income of $3 million for the year. The bonds are convertible into 625,000 shares of common. What is diluted EPS (rounded) ?

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  1. 4 January, 16:21
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    Diluted EPS is $0.89

    Explanation:

    diluted EPS=net income + (after tax interest on bonds) / (number of common stock+convertible shares)

    tax rate=tax paid/net income before tax

    tax paid=$4000,000-$3000,000

    =$1000,000

    net income before tax is $4,000,000

    tax rate=1000000/4000000

    =25%

    after tax interest on bonds=$5,000,000*6% * (1-0.25)

    =$225,000

    diluted EPS = ($3000,000+$225,000) / (3000000+625000)

    =0.889655172

    Approximately $0.89
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