Question

Problem 16-8 The information below pertains to Indigo Company for 2018. $1,140,000 1,900,000 Net income for the year 7% convertible bonds issued at par ($1,000 per bond); each bond is convertible into 30 shares of common stock 6% convertible, cumulative preferred stock, $100 par value; each share is convertible into 3 shares of common stock Common stock, $10 par value Tax rate for 2018 Average market price of common stock 3,870,000 5,700,000 40% $25 per share There were no changes during 2018 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 70,500 shares of common stock at $20 per share. (a) Compute basic earnings per share for 2018. (Round answer to 2 decimal places, e.g. $2.55.) Basic earnings per shares (b) Compute diluted earnings per share for 2018. (Round answer to 2 decimal places, e.0. $2.55.) Diluted earnings per share

Answer 1

Answer:

a)
Basic EPS
Net Income	$1,140,000
Less: Preferred Dividend (3,870,000 x 6%	-$232,200
Preferred stock is not assumed converted since conversion would be antidilutive
Earning available for common shareholders	$970,800
Number of shares outstanding = $5,700,000/$10	570,000
EPS =$970,800/570,000 shares	$1.70	per share
b)
Net Income	$1,140,000
Less: Preferred Dividend (3,870,000 x 6%	-$232,200
Interest savings (net of tax) 1,900,000 x 7% x (1-40%)	$79,800
Adjusted Net Income	$987,600
Average common shares		570,000	shares
Potentially dilutive common shares
Number of shares under warrant ($25 -$20)/$25 ) x 70500 shares	14,100
Number of Common shares issued assuming conversion of bonds=($1,900,000 ÷ $1,000) X 30 shares/bond	57000	71,100	shares
Total shares outstanding dilutive (570000+71100)		641,100
Dilutive EPS = $987,600/641,100 shares	$1.54	per share