Diluted EPS = adjusted earnings after conversion (EAC) / weighted average plus potential common shares outstanding.
Step 1: Calculate Adjusted EAC
|
adjusted EAC: |
|
net income - preferred dividends |
|
+ |
after-tax interest on convertible debt |
|
= |
adjusted earnings available for common shares |
preferred dividends = (0.08)(90)(2,000) = 14,400
convertible debt interest = (60,000)(0.06)(1 – 0.40) = 2,160
adjusted EAC = (30,000 – 14,400 + 2,160) = $17,760
Step 2: Calculate Weighted average plus potential common shares outstanding.
| weighted average common shares |
|
|
= |
5,000 |
| shares from conversion of convertible bonds |
= |
(60 × 110) |
= |
6,600 |
| weighted ave. plus potential common shares outst. |
|
|
= |
11,600 |
Step 3: Calculate Diluted EPS
Diluted EPS = 17,760 / 11,600 = $1.53.
