Question

Oriole Corporation had net income for the current fiscal year of $600,000, and common shares outstanding of 96,000. There were no changes to Oriole’s common shares during the year. Oriole also had outstanding a $1,000,000, 9% bond sold in a previous year that was convertible to 66,000 common shares. In addition, Oriole sold a new bond on October 1 of the current year. The new bond was a $1,000,000, 11% bond, convertible to 60,400 shares. Oriole was subject to a tax rate of 22%. (For simplicity, ignore the requirement to record the debt and equity portions of the convertible bond separately).

Calculate Oriole’s basic earnings per share. (Round answer to 2 decimal places, e.g. 15.25.)

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Calculate the after-tax interest paid on the 9% bonds.

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Determine an incremental per share effect for 9% bonds. (Round earnings per share to 3 decimal places, e.g. 15.257.)

Potentially dilutive security		Incremental Numerator Effect		Incremental Denominator Effect		EPS
9% Bonds		$				$

Calculate the after-tax interest paid on the 11% bonds.

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Determine an incremental per share effect for 11% bonds. (Round earnings per share to 3 decimal places, e.g. 15.257.)

Potentially dilutive security		Incremental Numerator Effect		Incremental Denominator Effect		EPS
11% Bonds		$				$

Rank the potentially dilutive securities from most dilutive to least dilutive.

9% bonds		Rank 1Rank 2Anti-dilutive
11% bonds		Rank 1Rank 2Anti-dilutive

Calculate Oriole’s diluted earnings per share. (Round calculations of EPS to 3 decimal places, e.g. $3.545 and provide final answer to 2 decimal places, e.g. 15.25.)

		Numerator		Denominator		EPS
Basic EPS		$				$
Sub Total						$
		$				$

Diluted EPS

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Answer 1

a)	Calculate Oriole’s basic earnings per share
	EPS=EAE(Earning Available For Equity)/No. Of Outstanding Shares
		Total No. Of Outstanding Shares	222400
		Earning Available For Equity	600,000
		EPS	600,000
			222400
		EPS	2.70
b)	Calculate the after-tax interest paid on the 9% bonds.
		Interest paid after tax formula	Interest Rate(1-Tax Rate)
		Interest Rate	9%
		Tax Rate	22%
		Interest paid after tax	7.0%
c)	Determine an incremental per share effect for 9% bonds.
	EPS=EAE(Earning Available For Equity)/No. Of Outstanding Shares
		EPS before 9% Bond convertible share
		Total No. Of Outstanding Shares	156400
		Earning Available For Equity	600,000
		EPS	600,000
			156400
		EPS	3.84
		EPS After 9% Bond convertible share
		Total No. Of Outstanding Shares	222400
		Earning Available For Equity	600,000
		EPS	600,000
			222400
		EPS	2.70
D)	Calculate the after-tax interest paid on the 11% bonds.
		Interest paid after tax formula	Interest Rate(1-Tax Rate)
		Interest Rate	11%
		Tax Rate	22%
		Interest paid after tax	8.6%
e)	Determine an incremental per share effect for 11% bonds.
	EPS=EAE(Earning Available For Equity)/No. Of Outstanding Shares
		EPS before 11% Bond convertible share
		Total No. Of Outstanding Shares	162000
		Earning Available For Equity	600,000
		EPS	600,000
			162000
		EPS	3.70
		EPS After 11% Bond convertible share
		Total No. Of Outstanding Shares	222400
		Earning Available For Equity	600,000
		EPS	600,000
			222400
		EPS	2.70