During 2011, Angel Corporation had 900,000 shares of common stock and 50,000 sha

Question

During 2011, Angel Corporation had 900,000 shares of common stock and 50,000 shares of 6% preferred stock outstanding. The preferred stock does not have cumulative or convertible features. Angel declared and paid cash dividends of $300,000 and $150,000 to common and preferred shareholders, respectively, during 2011. On January 1, 2010, Angel issued $2,000,000 of convertible 5% bonds at face value. Each $1,000 bond is convertible into 5 common shares. Angel's net income for the year ended December 31, 2011, was $6 million. The income tax rate is 20%.
What will Angel report as diluted earnings per share for 2011, rounded to the nearest cent?
A. $6.25
B. The correct answer isn't given.
C. $6.43
D. $6.22

Explanation / Answer

Basic EPS: 6000000 – 300,000 – 150,000 = 5,850,000 /900000= $6.50

Convertible bonds: Interest (after tax) = $2,000,000 x 5% x (1-20%) = 80,000 = $8.00 Convertible bonds 2,000 x 5 10,000

This Convertible bonds is anti-dilutive because $8 is greater than the Basic EPS of $6.50 So, do nothing if there’s anti-dilutive and do not include the convertible bonds (anti- dilutive) into the calculation for Diluted EPS

Diluted EPS = 5,850,000 /900000= $6.50

Answer is B The correct answer isn't given.

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