Question # 2 (10 marks)

Essex Ltd. provides the following information for 2020

1. Net income $ 690,000

2. Capital structure

a) Convertible 8% bonds. Each of the 300, $ 1,000 bonds is convertible into 40 common shares for the next 10 years 300,000

b) Common shares, 200,000 shares were outstanding on January 1.2020.

On April 1, an additional 40,000 shares were issued for cash. 2,000,000

c) Stock options outstanding to buy 20,000 common shares at $ 18 per share.

3. Other information

a) Bonds converted during 2020 None

b) Income tax rate 30%

c) Convertible debt was outstanding the entire year

d) Average market price per common share during 2020 $ 30

e) Stock options were outstanding the entire year

f) Stock options exercised during 2020 None

Instructions

1. Calculate basic earnings per share for 2020. Round to nearest cent. (3 marks)

Basic e.p.s :_____________________

2. Determine the potential for dilution of each security that is convertible into common shares and calculate the diluted earnings per share for 2020. Round to the nearest cent. (7 marks)

Incremental impact of options

Question # 2

Incremental impact of 8% bonds

Diluted e.p.s calculation