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 |
| + | dividends on convertible preferred stock |
| + | after-tax interest on convertible debt |
| = | adjusted earnings available for common shares |
preferred dividends = convertible preferred dividends = (0.08)(90)(500) = 3,600
convertible debt interest = (60,000)(0.06)(1 – 0.40) = 2,160
adjusted EAC = (30,000 – 3,600 + 3,600 + 2,160) = $32,160
Step 2: Calculate Weighted average plus potential common shares outstanding.
| weighted average common shares | | | = | 5,000 |
| shares from conversion of convertible preferred stock | = | (500 × 4) | = | 2,000 |
| shares from conversion of convertible bonds | = | (60 × 110) | = | 6,600 |
| weighted ave. plus potential common shares outst. | | | = | 13,600 |
Step 3: Calculate Diluted EPS
Diluted EPS = 32,160 / 13,600 = $2.36.
