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Question is above the solution. Can someone please explain how you work out the numbers in the solution. Thank you epsextrabondconv Bond facts Face amount
Question is above the solution. Can someone please explain how you work out the numbers in the solution.
Thank you
epsextrabondconv | |||
Bond facts | |||
Face amount | 1,500,000 | ||
Face rate | 12% | ||
1/1 and 7/1 interest payments | |||
Proceeds from issuance | 1,466,000 | ||
Discount amortized using straight line | |||
Issue date | 7/1/04 | ||
10 year term | |||
Each $1,000 bond convertible into 8 shares of $100 par common | |||
On 8/1/2005 $150,000 bonds were converted into common. Accrued interest on the converted | |||
bonds was paid at conversion | |||
Additional facts needed are as follows: | |||
Net income for 2005 | 6,000,000 | ||
Tax rate | 40% | ||
Common stock outstanding at 1/1/05 | 500,000 | ||
There were no stock transactions other than the bond conversion | |||
Calculate 2005 basic and diluted earnings per share |
epsextrabondconv | |||||||||||||
Bond facts | |||||||||||||
Face amount | 1,500,000 | ||||||||||||
Face rate | 12% | ||||||||||||
1/1 and 7/1 interest payments | |||||||||||||
Proceeds from issuance | 1,466,000 | this reflects a $34,000 discount | |||||||||||
Discount amortized using straight line | |||||||||||||
Issue date | 7/1/04 | ||||||||||||
10 year term | |||||||||||||
Each $1,000 bond convertible into 8 shares of $100 par common | |||||||||||||
On 8/1/2005 $150,000 bonds were converted into common. Accrued interest on the converted | |||||||||||||
bonds was paid at conversion | |||||||||||||
Additional facts needed are as follows: | |||||||||||||
Net income for 2005 | 6,000,000 | this reflects the effect of the actual conversion of $150,000 bonds on net income | |||||||||||
Tax rate | 40% | ||||||||||||
Common stock outstanding at 1/1/05 | 500,000 | ||||||||||||
There were no stock transactions other than the bond conversion | |||||||||||||
The basic calculation is as follows: | |||||||||||||
6,000,000 | = | 6,000,000 | = | 11.99 | |||||||||
500,000 + (150,000/1,000 * 8 shares per bond * 5/12) | 500,500 | ||||||||||||
The diluted calculation is as follows: | |||||||||||||
The numerator must take into account the interest that would not be incurred if the bonds were converted. Discount amortization is part of interest expense | |||||||||||||
and thus must also be taken into consideration for the appropriate periods. Interest expense and thus discount would be removed for 7/12 of the year | |||||||||||||
for the $150,000 of bonds that were converted and would be removed for the entire year for the bonds that were not actually converted but are assumed | |||||||||||||
converted in the diluted calculation | |||||||||||||
6,000,000 + ((1,350,000 *.12*.60) + (150,000 *.12*.60*7/12) + (34,000/10*1350/1500*.6) + (34,000/10* 150/1500*7/12*.60)) | = | 6,105,455 | = | 11.92 | |||||||||
500,500 + (1,350,000/1000*8) + (150,000/1,000 * 8 * 7/12) | 512,000 | ||||||||||||
The denominator assumes conversion of the 150,000 bonds as of 1/1 rather than 8/1 and conversion of the remaining 1,350,000 at 1/1 | |||||||||||||
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