During the current year, He Corporation had 3 million shares of common stock outstanding. $5,000,000 of 6% convertible bonds were issued at face amount at the beginning of the year. He Corporation reported income before tax of $4 million and net income of $3 million for the year. The bonds are convertible into 625,000 shares of common. What is diluted EPS (rounded) ?

Diluted EPS is $0.89

Explanation:

diluted EPS=net income + (after tax interest on bonds) / (number of common stock+convertible shares)

tax rate=tax paid/net income before tax

tax paid=$4000,000-$3000,000

=$1000,000

net income before tax is $4,000,000

tax rate=1000000/4000000

=25%

after tax interest on bonds=$5,000,000*6% * (1-0.25)

=$225,000

diluted EPS = ($3000,000+$225,000) / (3000000+625000)

=0.889655172

Approximately $0.89