Question

The Crane Corporation issued 10-year 54,100,000 par, 7% callable convertible subordinated debentures on January 2, 2020. The bonds have a par value of $1,000 with interest payable anually. The current conversion ratio is 15-1, and in 2 years it will increase to 17:1. At the date of issue, the bonds were sold at 96. Bond discount is amortized on a straight-line basis. Crane's effective tax was 20% Net Income in 2020 was $9,650,000, and the company had 2.140.000 shares outstanding during the entire year. Compute both basic and diluted earnings per share. (Round answers to 2 decimal places, es $2.55) Basic earnings per share Diluted earnings per share S $

Answer 1

1.

Computation of basic earnings per share is:

Basic earnings per share = Net income for the year 2020 / No. of shares

= $9,650,000 / 2,140,000

= 4.51

Hence, the basic earnings per share is 4.51

2.

Computation of diluted earnings per share is:

Diluted earnings per share = Total net income / Total no. of shares

= $9,892,720 / 2,209,700

= $4.48

Hence, the diluted earnings per share is $4.48

Working Notes:

a.

Computation of maturity value is:

Maturity value = Issued value of debentures * Percentage of debentures

= $4,100,000 * 0.07

= $287,000

Hence, the maturity value is $287,000.

b.

Computation of discount amortization is:

Discount amortization = [Issued value of debentures * (1 – 0.96) * 1/10]

= [$4,100,000 * (1 – 0.96) * 1/10]

= $164,000 * 1/10

= $16,400

Hence, the discount amortization is $16,400.

c.

Computation of interest expense is:

Interest expense = Maturity value + Discount amortization

= $287,000 + $16,400

= $303,400

Hence, the interest expense is $303,400.

d.

Computation of interest expense after payment of tax is:

Interest expense after payment of tax = Interest expense * (1 – Tax rate)

= $303,400 * (1 – 0.20)

= $303,400 * 0.80

= $242,720

Hence, the interest expense after payment of tax is $242,720.

e.

Computation of total net income is:

Total net income = Net income for the year 2020 + Interest expense after payment of tax

= $9,650,000 + $242,720

= $9,892,720

Hence, the total net income is $9,892,720.

f.

Computation the new number of shares is:

New number of shares = (Issued value of debentures / Par value of debenture) * Increased conversion ratio

= ($4,100,000 / $1,000) * 17

= 69,700

Hence, the number of shares is 69,700.

g.

Computation the total no. of shares is:

Total no. of shares = Old number of shares + New number of shares

= 2,140,000 + 69,700

= 2,209,700

Hence, the total no. of shares is 2,209,700.