Online Network Inc. has a net income of $510,000 in the current fiscal year. There are 100,000 shares of common stock outstanding along with convertible bonds, which have a total face value of $1.6 million. The $1.6 million is represented by 1,600 different $1,000 bonds. Each $1,000 bond pays 5 percent interest. The conversion ratio is 20. The firm is in a 30 percent tax bracket. a. Compute basic earnings per share. (Do not round intermediate calculations and round your answer to 2 decimal places.) b. Compute diluted earnings per share.
Basic earnings per share = Net Income/number of shares outstanding
= 510,000/100,000
= $5.1 per share
Diluted earnings per share:
Diluted earnings = 510,000+1600*1,000*5%(1-30%)
= $566,000
Dilutive shares = 100,000+1,600*20
= 132,000
Diluted earnings per share = 566,000/132,000
= $4.29 per share
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