Outstanding shares of stock:
Common 110,000 110,000
Convertible preferred 10,000 10,000
8% convertible bonds $1,000,000 $1,000,000
During 1988, Jones paid dividends of $3.00 per share on its preferred stock. The preferred shares are
convertible into 20,000 shares of common stock. The 8% bonds are convertible into 30,000 shares of common
stock. Net income for 1988 is $850,000. Assume that the income tax rate is 30%.
The diluted earnings per share for 1988 is:
a. $5.48
b. $5.66
c. $5.81
d. $6.26
I got A but the correct answer is C. I was able to calculate diluted shares @ 160 but I missed this question because in calculating diluted NI I subtracted the $3/share dividend on PS (I got diluted NI of 876K which is 30K understated). I'm assuming this is wrong because we're to assume that the PS is converted into CS and therefore we would disregard the $30K of dividends in calculating diluted NI? Becker wasn't clear on this point.