Prompt Co is calculating earnings per share amounts for incl

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?

Multiple Choice

$7.53

$17.13

$14.86

$9.57

Solution

Answer

D. $9.57

Explanation

Since Prompt’s only potentially dilutive security is the outstanding convertible bonds, which are antidilutive, diluted earnings per share (EPS) will be thesame as basic EPS. Basic EPS is net income of $110,000 divided by the weighted average common shares outstanding. That will be equal to 12,000 ×4/12 or 4,000 + 10,000 × 3/12 or 2,500 + 12,000 × 5/12 or 5,000 for a total of 11,500. As a result, basic EPS is $110,000/11,500 shares or $9.57 per share.