II. In 20x0 Bon Enterprises issued, at par, 60, $1,000, 8% bonds, each convertib
ID: 2474373 • Letter: I
Question
II. In 20x0 Bon Enterprises issued, at par, 60, $1,000, 8% bonds, each convertible into
100 shares of common stock. Bon had revenues of $17,500 and expenses other than interest and taxes of $8,400 for 20x1 (assume that the tax rate is 40%). Throughout 20x1, 2,000 shares of common stock were outstanding; none of the bonds was converted.
Required:
a) Compute basic and diluted EPS for 20x1.
b) Assume the same facts as for part 1), except that the 60 bonds were issued
on September 1, 20x1 (rather than 20x0), and none of them was converted. Compute basic and diluted EPS for 20x1.
Explanation / Answer
Answer
a) Revenues $17,500
Expenses
Other than interest ($8,400)
Bond interest (60*1000*.8) ($4,800)
Income before taxes $4,300
Income Taxes (40%) ($1,720)
Net Income $2,580
Diluted earning per share
= 2,580+(1-.40)(4,800)/(6000+2000) = $.68
Basic Earning per share =
(net income -Preferred dividends)/weighted average number of shares outstanding
=(2,580-(4,800))/2000 = $3.69
b)
Revenues $17,500
Expenses
Other than interest ($8,400)
Bond interest(60*1000*.08*4/12) ($1,600)
Income before taxes $7,500
Taxes(40%) ($3,000)
Net income $4,500
Diluted EPS
=4,500+(1-.40)(1,600)/2000+(6000*4/12) = $1.37
Basic EPS
=(4,500+1,600)/2,000 = $3.05