Shevlin Inc. had 700,000 shares of common stock outstanding at December 31, 2019. Shevlin issued an...
Shevlin Inc. had 700,000 shares of common stock outstanding at December 31, 2019. Shevlin issued an additional 60,000 shares of common stock on October 1, 2020. Shevlin also had $20,000,000 of 3% convertible bonds outstanding throughout 2020, which are convertible into a total of 400,000 shares of common stock. These convertible bonds were originally issued at par. Shevlin’s net income for the year ended December 31, 2020, was $2,200,000. Assuming the applicable income tax rate was 25%, diluted earnings per share for 2020 should be
A. $1.97 per share
B. $2.00 per share
C. $2.11 per share
D. $2.37 per share
E. None of above
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Homework Answers
Solution:
Weighted average outstanding shares in 2020 = 700000 + (60000*3/12) = 715000 shares
Net Income for 2020 = $2,200,000
Interest expense on bond (Net of tax) = $20,000,000*3% (1-0.25) = $450,000
Future net income after conversion of bond = $2,200,000 + $450,000 = $2,650,000
Future weighted average outstanding shares = 715000 + 400000 = 1115000 shares
Diluted Earning per share for 2020 = Future net income / Future weighted average outstanding shares
= $2,650,000 / 1115000 = $2.37 per share
Hence option D is correct.
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