Question

On January 1, 2020, Culver Company issued 10-year, $1,840,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 16 shares of Culver common stock. Culver's net income in 2020 was $473,800, and its tax rate was 20%. The company had 103,000 shares of common stock outstanding throughout 2020. None of the bonds were converted in 2020. (a) Compute diluted earnings per share for 2020. (Round answer to 2 decimal places, eg. $2.55.) Diluted earnings per share $

Answer 1

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Diluted Earnings per Share (DEPS): all the dilutive securities DEPS is a measure that shows the amount of income that each share will receive are converted, Some Dilutive securities are Convertible debentures, Convertible preference shares, Convertible bonds and stock options. Not all securities like stated above are dilutive. Some might increase the EPS, these are considered anti-dilutive. Dilutive Earnings per Share= {Net Income -Preferred Dividend+ Convertible Preferred Dividend+ [Convertible Debt interest(1-t)]} Weighted average of dilutive sharest All dilutive securities*. *All Dilutive Securities means shares that would have been issued if they were converted or issued. (a) Number of shares that would have been issued if bonds were converted = =$1,840,000/ $ 1000 x 16 =29,440 Shares. DEPS = $ 473,800+ [($ 1,840,000 x 6%)(1-0.2)] / (103000 + 29440) = ($ 473,800 + $ 88,320) / (103000 + 29440) = 4.245 (b) Number of shares that would have been issued if preference stock were converted = =$1,030,000/ $ 100 x 5 =51,500 Shares. DEPS $ 473,800 / (103000 + 51500) = ( $ 473,800 + $ 88,320) / (103000 + 51500) = 3.067 Note: Dividend on preferred stock need not be considered and adjusted from the net income since it is paid after tax, but interest on bonds is an pre-tax effect and rate has been applied accordingly.