A company has 1 million shares outstanding at $100 per share and $10 million of convertible bonds with par value $1000 and conversion price $50. How many diluted shares are outstanding?

A company has 1 million shares outstanding at $100 per share and $10 million of convertible bonds with par value $1000 and conversion price $50. How many diluted shares are outstanding?

• A. 1.3 million
• B. 1.2 million
• C. 1.1 million
• D. 1.0 million

Answer: (B)

Converting bonds into shares uses the number of shares each bond can be turned into, based on the conversion price. The bond issue has par value 1,000 and a conversion price of 50, so one bond converts into 1,000 / 50 = 20 shares. With 10 million in convertible bonds, there are 10,000 bonds outstanding (10,000,000 / 1,000). That yields 10,000 × 20 = 200,000 additional shares from conversion. Adding these to the 1,000,000 existing shares gives 1,200,000 diluted shares. This assumes all bonds are converted and no other dilutive effects are present.

Converting bonds into shares uses the number of shares each bond can be turned into, based on the conversion price. The bond issue has par value 1,000 and a conversion price of 50, so one bond converts into 1,000 / 50 = 20 shares. With 10 million in convertible bonds, there are 10,000 bonds outstanding (10,000,000 / 1,000). That yields 10,000 × 20 = 200,000 additional shares from conversion. Adding these to the 1,000,000 existing shares gives 1,200,000 diluted shares. This assumes all bonds are converted and no other dilutive effects are present.