The following information is for Polo Limited for 2017:
Net income for the year ...................................................... $2,300,000
8% convertible bonds issued at par ($1,000 per bond), with each bond convertible into 30 common shares ................................................................ 2,000,000
6% convertible, cumulative preferred shares, $100 par value, with each share convertible into three common shares ......................................................... 4,000,000
Common shares (600,000 shares outstanding) ........................... 6,000,000
Stock options (granted in a prior year) to purchase 75,000 common shares at $20 per share .................................................................................... 750,000
Tax rate for 2017 ................................................................... 30%
Average market price of common shares ............................. $25 per share
There were no changes during 2017 in the number of common shares, preferred shares, or convertible bonds out- standing. For simplicity, ignore the requirement to book the convertible bonds' equity portion separately.
Instructions
(a) Calculate basic earnings per share for 2017.
(b) Calculate diluted earnings per share for 2017.
(c) Discuss how a potential shareholder's investment decision may be affected if diluted earnings per share was not reported.