Exercise 16-25 On January 1, 2017, Monty Company issued 10-year, $1,840,000 face

Question

Exercise 16-25

On January 1, 2017, Monty Company issued 10-year, $1,840,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 16 shares of Monty common stock. Monty’s net income in 2017 was $273,000, and its tax rate was 40%. The company had 103,000 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 $1,030,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Monty common stock. (Round answer to 2 decimal places, e.g. $2.55.)

Explanation / Answer

a) Diluted earning per share = Adjusted net income/adjusted diluted shares

Adjusted net income = (1840000*6%*60%) = 66240+273000 = 339240

Adjusted diluted shares = (1840000*16/1000+103000) = 132440

Diluted earning per share = 339240/132440 = 2.56 per share

b) Diluted earning per share = Adjusted net income/adjusted diluted shares

Adjusted net income = 273000

Adjusted diluted shares = (1030000*5/100+103000) = 154500

Diluted earning per share = 273000/154500 = 1.77 per share

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