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Crocker Company: EPS with Convertible Bonds and Preferred Stock; compute EPS

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On January 1, 2008, Crocker Company issued 10-year, $2,000,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 15 shares of Crocker common stock. Crocker's net income in 2008 was $300,000, and its tax rate was 40%. The company had 100,000 shares of common stock outstanding throughout 2008. None of the bonds were converted in 2008.

a.) Compute diluted earnings per share for 2008.

b.) Compute diluted earnings per share for 2008 using the same facts as above except that $1,000,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Crocker common stock.

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The solution computes EPS with Convertible Bonds and Preferred Stock.

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Diluted EPS = {Net Income - Preferred Dividend + Convertible Debt Interest *(1-tax rate)}/(weighted average shares + shares from conversion of convertible preferred shares + shares from ...

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