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25 September, 04:48

Lerner Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $600,000 of 10% convertible bonds outstanding during 2018. The preferred stock is convertible into 40,000 shares of common stock. During 2018, Lerner paid dividends of $.55 per share on the common stock and $1.80 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 2018 was $360,000 and the income tax rate was 30%.

Required:

Diluted earnings per share for 2018 is (rounded to the nearest penny)

A. $1.35.

B. $1.39.

C. $1.51.

D. $1.57.

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Answers (1)
  1. 25 September, 04:55
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    A. $1.35.

    Explanation:

    Diluted Earning per share is calculated dividing Eaning or the year excluding preferred dividend by weighted average number of shares.

    Preferred stockholders has an advantage that they are paid first when there is any dividend is announced.

    Preferred Dividend = $20,000 x $1.8 = $36,000

    Diluted EPS = (Net Income - Preferred Dividend) / (Numbers of Outstanding shares + Convertible shares)

    Diluted EPS = ($360,000 - $36,000) / (200,000 + 40,000)

    Diluted EPS = $324,000 / 240,000 = $1.35 per share
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