On January 1, 2014, Crocker Company issued 10-year, $3,577,000 face value, 6% bo

Question

On January 1, 2014, Crocker Company issued 10-year, $3,577,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 19 shares of Crocker common stock. Crocker’s net income in 2014 was $253,000, and its tax rate was 45%. The company had 102,000 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 $1,020,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Crocker common stock. (Round answer to 2 decimal places, e.g. $2.55.)

Explanation / Answer

a)Number of shares issued for convertible bond = 3577000 * 19 /1000 = 67963 shares

Number of shares outstadning after conversion = 102000 + 67963 = 169963 shares

Interest net of tax = 3577000 * .06 * (1-.45 ) =118041

Income after conversion = 253000 + 118041 = 371041

Diluted EPS = 371041 / 169963 = 2.18 Per share

b)Preferred dividend = 1020000 *.06 = 61200

Income if converted = 253000+61200= 314200

Number of common stock issued for convertible preferred stock= 1020000* 5 /100 = 51000

Number of shares outstanding after conversio = 51000 + 102000 = 153000

Dilued EPS = 314200/153000 =$ 2.05 per share

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