During 20X3, Rory, Inc., reported net income of $15,000 and had 2,000 shares of common stock outstanding for the entire year. Rory also had 2,000 shares of 10%, $50 par value preferred stock outstanding during 20X3. During 20X1, Rory issued 100, SI,000 par, 6% bonds for $100,000. Each of these is convertible to 50 shares of common stock. Rory’s tax rate is 40%. Assuming these bonds are dilutive, 20X3 diluted EPS for Rory is closest to:
Diluted EPS = [NI — preferred dividends + convertible interest (1 - t)] / [weighted average shares + convertible debt shares].
100(1,000)(6%)(1 - 0.4) = $3,600; convertible debt shares = 50(100) = 5,000
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