Question #4 (8 marks)

[Extracted from the financials of Befuddled Corporation]

The Net income for 2018 was $500,000 and the average common shares outstanding during 2018 were 100,000. Thus, the basic eps = $500,000/100,000 = $5.00. Now assume that July 1, 2018 the Co. issued $1,000,000 of 8% convertible bonds, which were sold at par ($1,000 per bond). Each $1,000 bond is convertible into 25 C/S. In addition, as of January 1, 2018 there were options to buy 30,000 common shares at $25 per share. Assume an average price of $30 per share during the year. Compute diluted eps. Assume a tax rate of 40%.