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On January 1, 2017, Crane Company issued 10-year, $2,010,000 face value, 6% bonds, at par. Each...

Question:

On January 1, 2017, Crane Company issued 10-year, $2,010,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 15 shares of Crane common stock. Crane?s net income in 2017 was $302,000, and its tax rate was 40%. The company had 95,000 shares of common stock outstanding throughout 2017. None of the bonds were converted in 2017.

(a) Compute diluted earnings per share for 2017. (Round answer to 2 decimal places, e.g. $2.55.)

(b) Compute diluted earnings per share for 2017, assuming the same facts as above, except that $950,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Crane common stock. (Round answer to 2 decimal places, e.g. $2.55.)

Diluted Earnings per share

Diluted earnings per share arises when the potential common stock are exercised. Some of these potential common stocks are convertible bonds, convertible preferred stock, and etc.

Answer and Explanation:

Use this formula for the two requirements:

(Net Income + Interest expense, net of tax) / (Common stock outstanding + Converted shares)

a. The diluted earnings per share is $2.99

(302,000 + 72,360) / (95,000 + 30,150) = $2.99

(2,010,000 * 6%) * 60% = 30,150

b. The diluted earnings per share is $2.36

(302,000 + 34,200) / (95,000 + 47,500) = $2.36

(950,000 * 6%) * 60% = 47,500


Learn more about this topic:

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How to Calculate Earnings Per Share: Definition & Formula

from Introduction to Business: Homework Help Resource

Chapter 24 / Lesson 14
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