In 2013, Chirac Enterprises issued, at par, 75 $1,060, 8% bonds, each convertible into 200 shares...

Question:

In 2013, Chirac Enterprises issued, at par, 75 $1,060, 8% bonds, each convertible into 200 shares of common stock. Chirac had revenues of $19,100 and expenses other than interest and taxes of $8,860 for 2014. (Assume that the tax rate is 40%.) Throughout 2014, 2,530 shares of common stock were outstanding; none of the bonds was converted or redeemed.

(a) Compute diluted earnings per share for 2014. (Round answer to 2 decimal places, e.g. $2.55.)

(b) Assume the same facts as those assumed for part (a), except that the 75 bonds were issued on September 1, 2014 (rather than in 2013), and none have been converted or redeemed. (Round answer to 2 decimal places, e.g. $2.55.)

(c) Assume the same facts as assumed for part (a), except that 25 of the 75 bonds were actually converted on July 1, 2014. (Round answer to 2 decimal places, e.g. $2.55.)

Dilute Earnings Per Share:

Diluted Earning Per Share is a performance metric used to measure the quality of a company's earnings per share (EPS) if all convertible securities were put in place. Convertible securities are all outstanding convertible preferred shares, convertible debentures, stock options and warrants.

Answer and Explanation:

(A.) Diluted EPS = adjusted net income/weighted average number of shares outstanding

Revenue $19,100
Less;Expense- ($8,860)
Bond Interest (75 * 1,060 * .08) (6,360)
Income Before taxes $3,880
Income taxes(40%) (1,552)
Net Income $2,328

$2,328 + (1-.40)($6,360) = $6,144 = adjusted net income

2,530 + 15,000 = 17,530=weighted average number of shares outstanding

Diluted EPS =$6,144 / 17,530 = $0.35

(B.)

Revenue $19,100
Less; Expense ($8,860)
Bond Interest (75 * 1m060 * .08 * 4/12) ($2,120)
Income before taxes (19,100 - 10,980) $8,120
Income taxes(40%) ($3,248)
Net Income $4,872

$4,872 + (1-.40)($2,120) = $6,144 = adjusted net income

2,530 + (15,000 * 1/3 yr.) = 7,530 =weighted average number of shares outstanding

Diluted EPS = $0.82

(c).

Revenue $19,100
Less; Expenses ($8,860)
Bond Interest (75 * $1,060 * .08 *1/2) (3,180)
Bond Interest (50 * $1,060 * 0..08 * 1/2) (2,120)
Income before income taxes 4,940
Income taxes(40%) (1,976)
Net Income $2,964

Diluted earnings per share =$6,144 / 17,530 = $0.35

$2,964 + (1-.40)($5,300) = $6,144 = adjusted net income

2,530 + (5,000 * 1/2 yr.) + 10,000 + (5,000 * 1/2) = 17,530 =weighted average number of shares outstanding


Learn more about this topic:

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Calculating Earnings Per Share for Post-Retirement Benefits

from Accounting 202: Intermediate Accounting II

Chapter 9 / Lesson 4
298

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