# Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and...

## Question:

Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,000,000 of 5% convertible bonds outstanding during 2015. The preferred stock is convertible into 40,000 shares of common stock. During 2015, Hanson paid dividends of$.60 per share on the common stock and $2 per share on the preferred stock. Each$1,000 bond is convertible into 45 shares of common stock. The net income for 2015 was $400,000 and the income tax rate was 30%. Diluted earnings per share for 2015 is (rounded to the nearest penny) -$1.53.

- $1.67. -$1.41.

- $1.39. ## Diluted EPS: Diluted EPS is calculated to know what will be the impact on EPS if other convertible security converts into common stock. Convertible securities are those securities that will be converted into common stock if the holder exercise his right. ## Answer and Explanation: Diluted EPS = {eq}\frac{\text{net income - dividend }}{\text{average outstanding share + diluted share}} {/eq} Common stock = 200,000 Diluted stock from preference stock= 40,000 Diluted stock from bond =$1,000,000/1000*45=45,000

Total diluted share = 40,000 +45,000 = 85,000

Net income = $400,000 Add: interest on debt after tax;$1,000,000*5%*.7=$35,000 Net income without debt =$435,000

Diluted EPS = $435,000 /(200,000+85,000) =$435,000/285,000 = \$1.53 per share