A firm has convertible bonds, preferred equity, common equity and straight bonds in its capital structure. Its net income equals 7,800. The interest payments on straight debt equal 423 and that on convertible debt equals 680. The preferred equity holders received 220 in dividends. If the weighted number of shares for
Diluted EPS equals 1,300 and the firm is in the 40% tax bracket, the Diluted EPS equals _________. Assume the convertibles are dilutive.
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A. B. C. D.B
The earnings available for distribution amongst common stock holders and convertible bond holders equals Net income - preferred dividends + interest payments on convertible net of taxes. Therefore, earnings in the numerator = 7,800 - 220 +680*(1-40%) = 7,988. The Diluted EPS then equals 7,988/1,300 = 6.14.