Rao Corporation had a net income of $50,000 for the year ended December 31, 2011, and a weighted average number of common shares outstanding of 10,000. The following information is provided regarding the capital structure:
1. 7% convertible debt, 200 bonds each convertible into 40 common shares. The bonds were outstanding for the entire year. The income tax rate is 40%. The bonds were issued at par ($1,000 per bond). No bonds were converted during the year.
2. 4% convertible, cumulative $100 preferred shares, 1,000 shares issued and outstanding. Each preferred share is convertible into two common shares. The preferred shares were issued at par and were outstanding the entire year. No shares were converted during the year.
(a) Calculate the basic earnings per share for 2012.
(b) Briefly explain the if-converted method.
(c) Calculate the diluted earnings per share for 2012, using the if-converted method. For simplicity, ignore the requirement to record the debt and equity components of the bond separately.