During 2018, angel corporation had 900,000 shares of common stock and 50,000 shares of 6% preferred stock outstanding. the preferred stock does not have cumulative or convertible features. angel declared and paid cash dividends of $300,000 and $150,000 to common and preferred shareholders, respectively, during 2018. on january 1, 2017, angel issued $2,000,000 of convertible 5% bonds at face value. each $1,000 bond is convertible into five common shares. angel's net income for the year ended december 31, 2018, was $6 million. the income tax rate is 20%. what will angel report as diluted earnings per share for 2018, rounded to the nearest cent?

$6.52 per share

Explanation:

Basic earning per share:

= Earning available to equity shareholders ÷ Total no. of equity shares

= (Net income - Dividend paid to preferred shareholders) ÷ 900,000

=  ($6,000,000 - $150,000) ÷ 900,000

= $5,850,000 ÷ 900,000

= $6.5

Number of converted bonds in to shares :

= 2,000,000 × (5 ÷ 1000)

= 10,000 shares

Interest on debt:

= $2,000,000 × 0.05

= $100,000

After tax interest :

= $100,000(1 - 0.20)

= $80,000

Diluted earning per share:

= [net income + increase in interest (after tax)-preferred dividend] ÷ [weighted average common shares + converted shares]

= [6,000,000 + 80,000 - 150,000] ÷ [900,000+10,000]

= 5,930,000 ÷ 910,000

= $6.52 per share

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