How much will be FDC’s Diluted Earnings per Share if all the convertible bonds a

Question

How much will be FDC’s Diluted Earnings per Share if all the convertible bonds are converted into common (assume no preferred conversion)?

Fixer Downer Corp (FDC) has provided you with the following information :

$4.643

$4.000

$5.307

$4.128

Net income available to common stockholders $2,600 Tax rate 40% Interest expense on convertible bonds $620 Number of common stock shares (this year) 560 Number of common stock shares (last year) 560 Market price per share common stock $80 Number of convertible bonds 40 Common shares for each long-term bond if converted 8

Explanation / Answer

Present Income                                                                $ 2,600

Add: interest on debentures      $620

Less: tax on interest @40%        248                                    372

Total income available to common shareholders               2,972

Diluted EPS = Total income avabilable to common shareholders after conversion/Weithted average no. of shares outstanding after conversion = 2972/(560 x 12/12)+(40x8x6/12) = 2972/720 = $4.128

Note: It is assumed that conversion takes place after 6 months of starting of the year

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