On January 1, 2017, Draper Inc. issued $4 million of face value, five-year, 6% bonds at par. Each $1,000 bond is convertible into 20 common shares. Draper's net income in 2017 was $200,000, and its tax rate was 25%. The company had 100,000 common shares outstanding throughout 2017. None of the bonds were exercised in 2017. For simplicity, ignore the requirement to record the bonds' debt and equity components separately.
Instructions
(a) Calculate diluted earnings per share for the year ended December 31, 2017.
(b) Calculate diluted earnings per share for 2017, assuming the same facts as above, except that $2 million of 6% cumulative convertible preferred shares was issued instead of the bonds. Each $100 preferred share is convertible into five common shares.