During 2018, Angel Corporation had 900,000 shares of common stock and 50,000 sha

Question

During 2018, Angel Corporation had 900,000 shares of common stock and 50,000 shares of 6% preferred stock outstanding. The preferred stock is not convertible. Angel declared and paid cash dividends of $300,000 and $150,000 to common and preferred shareholders, respectively, during 2018. On January 1, 2017, Angel issued $2,000,000 of convertible 5% bonds at face value. Each $1,000 bond is convertible into 10 common shares. Angels net income for the year ended December 31, 2018, was $6 million. The income tax rate is 20%. What is Angel's basic earnings per share for 2018, rounded to the nearest cent? What will Angel report as diluted earnings per share for 2018, rounded to the nearest cent?

Explanation / Answer

Basic earnings per share: [Net income -preferred dividend ]/weighted average number of common shares

            = [6,000,000 - 150,000. ]/900,000

               = 5850000/900000

                = $ 6.5 per share

2)

number of converted bonds in to shares : 2000000*10/1000=20000 shares

Interest on debt : 2000000*.05 = 100000

After tax interest :100000(1-.20)= 80000

Diluted earning per share :[net income +increase in interest (after tax)-preferred dividend]/[weighted average commonshares+converted shares]

        =[6000000+80000-150000]/[900000+20000]

         = 5930000/920000

            = $6.45 per share

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