ExpertHard1 markMultiple Choice
CPA · Question 41 · Area II: Technical Accounting
Calculate Diluted EPS.<br/>- Net Income: $500,000<br/>- Weighted Avg Common Shares: 100,000<br/>- 10,000 Options outstanding, exercise price $20. Average market price $25.<br/>- Convertible Bonds: 1,000 bonds, convertible into 20 shares each. Interest expense saved (net of tax) = $30,000.
Calculate Diluted EPS.<br/>- Net Income: $500,000<br/>- Weighted Avg Common Shares: 100,000<br/>- 10,000 Options outstanding, exercise price $20. Average market price $25.<br/>- Convertible Bonds: 1,000 bonds, convertible into 20 shares each. Interest expense saved (net of tax) = $30,000.
Answer options:
A.
$4.33
B.
$4.80
C.
$4.34
D.
$5.00
How to approach this question
1. Calculate Basic EPS. 2. Test Options (Treasury Stock Method). 3. Test Bonds (If-Converted Method). 4. Combine if dilutive.
Full Answer
C.$4.34✓ Correct
Options add 2,000 net shares. Bonds add 20,000 shares and $30,000 income. New EPS = $530k / 122k = $4.34. Since $4.34 < $5.00, both are dilutive.
Common mistakes
Forgetting to add back interest; miscalculating treasury stock shares.
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