27 E16-25 (EPS with Convertible Bonds and Preferred Stock) On lanuary 1, 2012, L

ID: 2331394 • Letter: 2

Question

27 E16-25 (EPS with Convertible Bonds and Preferred Stock) On lanuary 1, 2012, Lindsey Company of Lindsey common stock. Lindsey's net income in 2013 was $240,000, and its tax rate was 40%. The 10-year, $3,000,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 15 shares company had 100,000 shares of common stock outstanding throughout 2012. None of the bonds were converted in 2012. Instructions (a) Compute diluted earnings per share for 2012. (b) Compute diluted earnings per share for 2012, assuming the same facts as above, except that $1,000,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Lindsey common stock.

Explanation / Answer

ANSWER:

Net Income

240,000

Plus: Interest savings [180,000 * (1-40%)]

108,000

Adjusted net income

348,000

Additional shares after conversion

45,000

Diluted EPS (348,000 / 145,000)

2.40

Initial Shares

100,000

Plus: New Shares Issued (per conversion)

50,000

Shares outstanding adjusted for dilutive securities

150,000

Diluted EPS (240,000 / 150,000)

1.60