Explanation

Basic EPS Calculation:

• Net income: $1,200,000 (no preferred dividends).
• Weighted average shares outstanding:
  • 1,000,000 shares for 3 months (January to March): 1,000,000 × (3/12) = 250,000.
  • 1,100,000 shares for 9 months (April to December): 1,100,000 × (9/12) = 825,000.
  • Total weighted average shares: 250,000 + 825,000 = 1,075,000.
• Basic EPS: $1,200,000 / 1,075,000 = $1.12.

Diluted EPS Calculation:

• After-tax interest on convertible bonds: $2,000,000 × 8% × (1 - 30%) = $112,000.
• Adjusted net income: $1,200,000 + $112,000 = $1,312,000.
• Additional shares from conversion: 200,000.
• Total diluted shares: 1,075,000 + 200,000 = 1,275,000.
• Diluted EPS: $1,312,000 / 1,275,000 = $1.029, rounded to $1.03.

Why not A or C?

• Option A incorrectly uses the period-end shares (1,100,000) plus conversion shares (200,000) without weighting, leading to an incorrect denominator.
• Option C mistakenly adds the pre-tax interest ($160,000) to net income instead of the after-tax interest, resulting in an inflated numerator.