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I. Metro, Inc. had 50,000 shares of common stock outstanding and 3,000 shares of 7%, $50 par, cumulative preferred stock (non-convertible) at January 1, 20x1. On March 31, 20x1, an additional 12,000 shares were sold for $50. On May 31, Metro purchased 2,000 shares of common stock on the open market as treasury stock paying $40 per share. Metro also had $600,000 of 5% convertible bonds outstanding throughout the year. The bonds are convertible into 25,000 shares of common stock. Net income for the year was $150,000. The tax rate is 40%.

Compute basic and diluted earnings per share for the year ended December 31, 20x1.

II. Assume that the following data relative to Metro Co. for 20x1 is available:

Net Income (40% tax rate): $3,200,000

Transactions in common shares

1/1 Beginning number 1,000,000 shares

3/1 Purchase of treasury shares (60,000)

6/1 Stock split, 3 for 1

9% cumulative convertible preferred stock

Issued (in 20x0) at par ($1,000,000), convertible into 200,000 shares of common stock.

Stock options

No stock option was exercised in 20x1, but exercisable at the option price of $35 per share. If exercised, 60,000 common shares would be issued.

Average market price in 20x1 is $40.

Compute the basic and diluted EPS for 20x1.

IV. Metro Inc. has decided to raise additional capital by issuing $170,000 face value of bonds with a coupon rate of 10%. In discussions with their investment bankers, it was determined that to help the sale of bonds, detachable stock warrants should be issued at the rate of one warrant for each bond sold. The value of the bonds without the warrants is considered to be $136,000, and the value of the warrants in the market is $24,000. The bonds with stock warrants sold in the market at issuance for $152,000.

Each stock warrant can purchase two shares of Metros $2 par common stock at $40 per share.

1. What entry should be made at the time of the issuance of the bonds and warrants?
2. What entry should be made if all stock warrants are exercised when the stock price is $50 per share.

	Bond	136,000	0.85
	Warrant	24000	0.15
	Tot. FV	160,000
	Allocation between Bond and Warrant:
	Bond = 152,000*.85 = 129,200
	Warrant = 152,000*.15 = 22,800
	Dr. Cash			152,000
	Disc on B/P			40,800	(170,000 - 129,200)
		Cr. B/P			170,000
		PCIEP - S Warrant			22,800

Dr. Cash (340*40) 13,600 PCIEP-SW 22,800 Cr. C St.(340 sh *2) 680 PCIEP, C St. 35,720