Convertible Bonds and Preferred Stock) On January 1, 2014, Crocker Company issued
10-year, $2,000,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 15 shares of Crocker
common stock. Crocker�s net income in 2014 was $300,000, and its tax rate was 40%. The company had
100,000 shares of common stock outstanding throughout 2014. None of the bonds were converted in 2014.
Instructions
(a) Compute diluted earnings per share for 2014.
(b) Compute diluted earnings per share for 2014, assuming the same facts as above, except that
$1,000,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred
share is convertible into 5 shares of Crocker common stock.

Explanation:

1.

Net income $300,000

Add: interest savings, net of tax [2,000,000*6%(100%-40%)] $72,000

Net income after dilution $372,000

Shares outstanding during 2014  100,000

Add: Diluted shares [(2,000,000/1000)*15] 30,000

Total outstanding shares after dilution 130,000

Diluted earnings per share $2.86 [372,000/130,000]

2.

Net income $300,000

Less: Preferrence dividend after conversion $0

Net income after dilution $300,000

Shares oustanding during 2014   100,000

Add: Diluted shares [(1,000,000/$100)*5]   50,000

Total outstanding shares after dilution 150,000

Diluted earnings per share $2 [300,000/150,000]

a) $2.86

b) $2

they have a larger number of potential customers because people anywhere can buy from them. ( d.)

d. low interest rates