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27 February, 19:55

During 2011, Angel Corporation had 900,000 shares of common stock and 50,000 shares of 6 percent preferred stock outstanding. The preferred stock does not have cumulative or convertible features. Angel declared and paid cash dividends of $300,000 and $150,000 to common and preferred shareholders, respectively, during 2011. On January 1, 2010, Angel issued $2,000,000 of convertible 5% bonds at face value. Each $1,000 bond is convertible into 5 common shares. Angel's net income for the year ended December 31, 2011, was $6 million. The income tax rate is 20%. What will Angel report as diluted earnings per share for 2011, rounded to the nearest cent? A. $6.25B. The correct answer isn't given. C. $6.43D. $6.22

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  1. 27 February, 21:59
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    B. The correct answer isn't given.

    Explanation:

    Step 1 Calculate Basic Earning per Share

    Basic Earning per Share = Earnings Attributable to Common Stock Holders / Weighted Average Number of Common Stock Holders

    Earnings Attributable to Common Stock Holders:

    Net income for the year ended December 31, 2011 6,000,000

    Preference dividend (150,000)

    Interest on Bonds ($100,000*80%) (80,000)

    Earnings Attributable to Common Stock Holders 5,770,000

    Basic Earning per Share = $5,770,000/900,000 shares

    = $6.41

    Step 2 Calculate Diluted Earnings per Share

    Diluted Earning per Share = Adjusted Earnings Attributable to Common Stock Holders / Adjusted Weighted Average Number of Common Stock Holders

    Adjusted Earnings Attributable to Common Stock Holders:

    Earnings Attributable to Common Stock Holders 5,770,000

    Add Interest on Bonds ($100,000*80%) 80,000

    Earnings Attributable to Common Stock Holders 5,850,000

    Adjusted Weighted Average Number of Common Stock Holders

    Shares of common stock 900,000

    Add Convertible Bonds (2,000,0000/1,000*5) 10,000

    Weighted Average Number of Common Stock Holders 910,000

    Diluted Earning per Share = 5,850,000/910,000

    = $6.43

    The Convertible Bonds are Anti-Dilutive on comparison with the Basic Earnings per share.
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