New Gestalt, Inc., a software firm had a net income of 1.7 million last year. It has 200,000 common shares and 300,000 convertible bonds with face value of 100 outstanding. The convertible bonds carry a coupon of 4% and can be converted one-for-one. The average stock price last year was 39 and the maximum price was 57. The effective interest rate on the convertible debt is 8%. New Gestalt issued 100,000 preferred shares with face value 100 and a coupon of 5% on March
31st of last year. Assume the convertible bonds are dilutive and that New Gestalt faces a 30% tax rate. Given the above, New Gestalt's Diluted EPS equals
________.
Click on the arrows to vote for the correct answer
A. B. C. D.C
Diluted EPS = (Net Income - Preferred dividends + interest on convertibles net of taxes)/(weighted # of common shares assuming convertible conversion) In this case, numerator = 1.7 million - 375,000 + 300,000*8%*100*(1-30%) = 3,005,000. The denominator equals 200,000 + 300,000 = 500,000. Therefore, Diluted EPS
= 6.01. Note that the interest expense on the convertible bond is calculated using the effective interest rate, not the coupon rate.