Diluted EPS

CFA Level I FRA
#1

Ajax Company’s capital structure was as follows:

12.31.04 12.31.03

Shares outstanding:

Common 200,000 200,000

Convertible preferred 5,000 5,000

6% Convertible Bonds $500,000 $500,000

  • During 2004, Ajax paid dividends of $2.00 per share on its preferred stock.
  • The preferred shares are convertible into 10,000 shares of common stock.
  • The 6% bonds are convertible into 15,000 shares of common stock.
  • Net income for 2004 was $400,000.
  • Assume that income tax rate is 40%.

Ajax’s basic and diluted earnings per share for 2004 are:

Diluted EPS: [400,000 + (30,000 × 0.6)] / [200,000 + 10,000 + 15,000] = $1.86 per share

My question: Where does the “30,000 x 0.6” come from?

Thank you

#2

30,000 is the annual interest on the convertible bonds; 0.6 = 1 − 40%.