Prompt Co. is calculating earnings per share amounts for inclusion in the annual

Question

Prompt Co. is calculating earnings per share amounts for inclusion in the annual report to shareholders. Prompt has obtained the following information from the controller’s office as well as shareholder services:

Net income from January 1 to December 31 $ 110,000

Corporate income tax rate 30 %

Number of outstanding shares:

January 1 to April 30 12,000

May 1 to July 31 10,000

August 1 to December 31 12,000

In addition, Prompt has $1,000,000 face value 10-year convertible bonds outstanding on January 1. The bonds were issued three years ago at a discount, which is being amortized in the amount of $7,000 per year. The stated rate of interest on the bonds is 8%, and the bonds were issued to yield 9%. Each $1,000 bond is convertible to 30 shares of Prompt’s stock.
Assuming the bonds are antidilutive securities, what amount is Prompt’s diluted earnings per share for the year ended December 31?

a. $9.57
b. $14.86
c. $7.53
d. $17.13

Explanation / Answer

While Calculating DPS we have to consudered Potential Equity Shares. In this question Convertible bond are such instrument which can be converted into shares but these are antidilutive securities. Hence Basic EPS and Diluted EPS will Be same.

Basic EPS= Earning Eatributable to ESH/Weighted Avg of Outsatnding Equity Shares

Earning Attributable to ESH= 110,000

Weighted Avg of Outsatnding Equity Shares= (12000*4/12)+(10,000*3/12)+(12000*5/12)

                                                              =4000+2500+5000=11500

BEPS=110000/11500=9.57

DEPS=9.57

Option A is coorect

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