# 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:

How to Calculate Earnings Per Share: Definition & Formula

from Introduction to Business: Homework Help Resource

Chapter 24 / Lesson 14
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