The Barnaby Boat Company has current earnings of $3 a share with 500,000 shares of common stock outstanding. The company plans to issue 40,000 shares of 7 percent, $50-par-value convertible preferred stock at par. The preferred stock is convertible into two shares of common for each preferred share held. The common stock has a current market price of $21 per share.

a. What is the preferred stock's conversion value?

b. What is its premium over conversion value?

c. Assuming that total earnings stay the same, what will be the effect of the issue on basic earnings per share (i) before conversion? (ii) on a diluted basis?

d. If profits after taxes increase by $1 million, what will be basic earnings per share (i) before conversion? (ii) on a diluted basis?