Homework Answers
Net Income =$700,000
Number of shares=100,000
Face value=1.5 million
Conversion ratio is 10
Tax bracket 20%
A. Basic earnings per share = Net Income/ Number of shares = $700,000/100,000 =$7.
Basic earnings per share=$7
B. Diluted earnings per share= Adjusted Earnings after taxes/ Shares outstanding + All convertible securities
Now, calculating Adjusted Earnings after taxes=Net Income + Interest savings *(1- tax rate)
=$700,000 +96000 *(1-0.20)
=$776,800
All convertible securities=1,500 convertible bonds *10 conversion ratio=15,000
Now, Diluted earnings per share= Adjusted Earnings after taxes/ Shares outstanding + All convertible securities
=$776,800/(100,000+15,000) = $6.75
Diluted earnings per share= $6.75
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