Reference no: EM132586456

Question 1: Officials for the Lexington Company are preparing financial statements for Year One. The company is reporting net income of $900,000. The company had 100,000 shares of common stock outstanding at the beginning of the year but a stock split on October 1 doubled that number to 200,000. In the previous year, the company issued 10,000 convertible bonds with a face value of $1,000 each that will come due in ten years. Each bond is convertible into 15 shares of common stock (adjusted for the stock split). These bonds pay 4 percent interest but were sold for 93 percent of face value to generate a higher interest rate for the buyers. The tax rate for the company is assumed to be 30 percent. The bond discount is being amortized by the straight-line method. What should the company report as its diluted earnings per share (rounded)?

Option 1: $3.55

Option 2: $3.81

Option 3: $3.51

Option 4: $3.67