# On January 1, 2014, Crocker Company issued 10-year, $3,126,000 face value, 6% bonds, at par. Each... ## Question: On January 1, 2014, Crocker Company issued 10-year,$3,126,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 25 shares of Crocker common stock. Crocker?s net income in 2014 was$269,000, and its tax rate was 45%. The company had 101,000 shares of common stock outstanding throughout 2014. None of the bonds were converted in 2014.

(a) Compute diluted earnings per share for 2014. (Round answer to 2 decimal places, e.g. $2.55.) (b) Compute diluted earnings per share for 2014, assuming the same facts as above, except that$1,010,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 10 shares of Crocker common stock. (Round answer to 2 decimal places, e.g.$2.55.)

## Diluted earning per share :

Dilutive securities are securities that have the possibility of becoming outstanding shares. Diluted EPS is calculated to know the impact of EPS if diluted security converts into common stock. Diluted EPS is more detailed than EPS as it reflect the true shareholder value based on which the earnings per share are allocated.

Net Income : $269,000 Add : Debt interest adjusting tax 3126,000*6%*.55 :$103,158

Net income Before debt interest : $372,158 Diluted share =$3,126,000/1000*25= 78,150

{eq}Diluted EPS=\frac{\text{Net income -Dividend on preferred stock}}{\ text{Average outstanding share +Diluted share}} {/eq}

= $372,158/(101,000+78,150) =$2.08 per share

b) Diluted share =$1,010,000/100*10=101,000 Dividend on preferred stock =$1,010,000* 6% = $60,600 Diluted EPS = ($269,000 - $60,600)/(101,000+101,000) =$208,400/202,000 = \$1.03 per share