Questions #3

The following data are presented by Prince Corp. for calendar 2020

Net income of the year $ 4,500,000

Capital structure (December 31, 2020)

8% convertible bonds; convertible into 100,000 common shares $ 7,500,000

$6, cumulative preferred shares, 20,000 shares out standing,

Each convertible into two common shares $ 1,600,000

360,000 call options exercisable at $ 25 per share

250,000 call options exercisable at $32 per share

Common shares outstanding, 1,000,000 shares

Additional information

1. The common and the convertible preferred shares were outstanding from the beginning of the year. The convertible bonds were issued on April 1, 2020.

2. The average market price of the common shares in 2020 was $ 30. The stock price was $ 27 on January 1, 2020, and $ 35 on December 31, 2020.

4. The convertible bonds were sold at par. Ignore the equity component of the convertible bonds.

5. The income tax rate for 2020 is 20%.

Instructions

Use the four-step approach discussed in the class to determine Princes basic EPS and the diluted EPS for 2020.