Question

On January 2, 2016, Sarah Lawrence Co. issued at face value $10,000 4% bonds convertible in total into 2,000 shares of Lawrence’s common stock. No bonds were converted during 2016. Throughout 2016, Lawrence had 10,000 shares of common stock outstanding. Lawrence’s 2016 net income was $2,000. The income tax rate id 40%. No potential common shares other than the convertible bonds were outstanding during 2016. Diluted earnings per share for 2016 would be:

a) $.20
b) $.19
c) $.17
d) $.15

Answer 1

b) $.19

Step-by-step explanation:

Diluted earnings per share

= [net income + (convertible debt interest(1 - tax rate)]/(outstanding common shares + potential shares )

= [$2000 + ($400×(1 - 0.40)]/(10000 + 2000 )

= $2240/12000

= $0.19

Diluted earnings per share for 2016 would be $0.19