Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,500,000 of 5% convertible bonds outstanding during 2018. The preferred stock is convertible into 40,000 shares of common stock. During 2015, Hanson paid dividends of $.90 per share on the common stock and $3 per share on the preferred stock. Each $1,000 bond is convertible into 30 shares of common stock. The net income for 2018 was $600,000 and the income tax rate was 30%. Reference: Ref 16-5 Diluted earnings per share for 2018 is (rounded to the nearest penny) Group of answer choices

a. $2.29.

b. $2.12.

c. $2.08.

d. $2.50.

Question

Business

Nikolas Best

2 December, 11:50

Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,500,000 of 5% convertible bonds outstanding during 2018. The preferred stock is convertible into 40,000 shares of common stock. During 2015, Hanson paid dividends of $.90 per share on the common stock and $3 per share on the preferred stock. Each $1,000 bond is convertible into 30 shares of common stock. The net income for 2018 was $600,000 and the income tax rate was 30%. Reference: Ref 16-5 Diluted earnings per share for 2018 is (rounded to the nearest penny) Group of answer choices

a. $2.29.

b. $2.12.

c. $2.08.

d. $2.50.

+5

Answers (1)

Know the Answer?

Jolie Osborn · Answer 1

Option (a) is correct.

Explanation:

Convertible preferred stock:

Numerator effect = 20,000 shares * $3

= $60,000

Denominator effect = 40,000 shares

Overall effect = $60,000 : 40,000

= $1.50

Convertible bonds:

Numerator effect = $1,500,000 * 5% * (1 - 0.30)

= $52,500

Denominator effect = ($1,500,000 : $1,000) bonds * 30 shares

= 45,000 shares

Overall effect = $52,500 : 45,000

= $1.17

Tentative diluted EPS with only convertible bonds effect:

= [$600,000 - (20,000 * $3) + $52,500] : (200,000 + 45,000)

= $592,500 : 245,000

= $2.42

Effect of convertible preferred:

= [$592,500 + $60,000] : (245,000 + 40,000)

= $2.29