Question

DiCenta Corporation reported net income of \(270,000 in 2017 and had 50,000 shares of common stock outstanding throughout the year. Also outstanding all year were 5,000 shares of cumulative preferred stock, each convertible into 2 shares of common. The preferred stock pays an annual dividend of \)5 per share. DiCenta’s tax rate is 40%. Compute DiCenta’s 2017 diluted earnings per share.

Short answer

DiCenta’s 2017 diluted earnings per share are $4.50.

Step-by-step solution

The following information is given

Net Income: $270,000

Common stock outstanding: $50,000

Preferred stock of 5,000 shares are converted into 2 shares of common stock.

The annual dividend is $5 per share.

Tax rate: 40%

Computation of Diluted EPS

Net income	$270,000
Weighted-average number of shares adjusted for dilutive securities (50,000 + 10,000)	÷ 60,000
Diluted EPS	$4.50