Question

On January 1, 2020, Riverbed Company issued 10-year, $2,150,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 16 shares of Riverbed common stock. Riverbed’s net income in 2020 was $518,950, and its tax rate was 20%. The company had 97,000 shares of common stock outstanding throughout 2020. None of the bonds were converted in 2020.

(a) Compute diluted earnings per share for 2020. (Round answer to 2 decimal places, e.g. $2.55.)

Diluted earnings per share

$enter diluted earnings per share rounded to 2 decimal places

(b) Compute diluted earnings per share for 2020, assuming the same facts as above, except that $970,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Riverbed common stock. (Round answer to 2 decimal places, e.g. $2.55.)

Diluted earnings per share

$enter diluted earnings per share rounded to 2 decimal places

Answer 1

Answer - Part - (a) -

Step - (1) - Calculation of Adjusted Net Income -

	Particulars	Explanation	Amount ($)
I.	Net income	Given in question	518950
II.	Interest Savings [net of tax]	($2150000 * 6%) - 20% tax	103200
Adjusted Net Income		I + II	622150

.

Step - (2) - Calculation of Shares Outstanding adjusted for Dilutive Securities -

	Particulars	Explanation	No. of Shares
I.	Shares of common stock outstanding	Given in question	97000 shares
II.	Conversion of dilutive securities	(16 shares / $1000) * $2150000	34400 shares
Shares Outstanding adjusted for Dilutive Securities		I + II	131400 shares

.

Step - (3) - Calculation of Diluted Earnings Per Share for 2020 -

= Adjusted Net Income / Shares Outstanding adjusted for Dilutive Securities

= Step - (1) / Step - (2)

= $622150 / 131400 shares

= $4.73

.

Answer - Part - (b) -

Step - (1) - Calculation of Adjusted Net Income -

	Particulars	Explanation	Amount ($)
I.	Net income	Given in question	518950
II.	Preferred dividends	Preferred dividends are not deducted since preferred stock was assumed converted into common stock.	0
Adjusted Net Income		I - II	518950

.

Step - (2) - Calculation of Shares Outstanding adjusted for Dilutive Securities -

	Particulars	Explanation	No. of Shares
I.	Shares of common stock outstanding	Given in question	97000 shares
II.	Conversion of dilutive securities	(5 shares / $100) * $970000	48500 shares
Shares Outstanding adjusted for Dilutive Securities		I + II	145500 shares

.

Step - (3) - Calculation of Diluted Earnings Per Share for 2020 -

= Adjusted Net Income / Shares Outstanding adjusted for Dilutive Securities

= Step - (1) / Step - (2)

= $518950 / 145500 shares

= $3.57