Question

The company has the following information for 2018

Net income		$1,200,000
	8% convertible $1,000 bonds issued 1/1/15 for $2,140,472 yielding 7% with annual coupons – Due 1/1/25 - Each bond converts to 50 shares of common stock		$2,000,000 face amount
	9% convertible, cumulative $100 par preferred stock -Each share converts to 3 shares of common stock		$3,000,000
	Common stock, $10 par		$5,000,000
	Common stock options (granted in 2016) to purchase 60,000 shares of common stock at $20 per share
	Tax rate		25%
	Average market price per share for common stock during the year		$26

1. Compute basic and diluted EPS for 2018 (to the nearest tenth of a cent).
2. Compute basic and diluted EPS for 2018 assuming the stock options were granted on March 1, 2018.
3. Compute basic and diluted EPS for 2018 assuming the stock options were granted on March 1, 2018 and the debt was issued on July 1, 2018 (don’t forget to adjust net income).

Prepare an amortization schedule first

Answer 1

1 Answer: Working 3 (a) Basic and Diluted EPS for 2018 4 Basic EPS A) Net Income 6 (B) Weighted Average Outstanding Common Stock 5000000/10 Common Stock (existing) Common Stock Options 60000 560000 9 10 Basic Earning per share for 2018 2.14| |=+65/G8 Diluted EPS 13 14 15 16 17 18 A) Net Income 1590000 2000000 0.08 0.75 +3000000 0.09 (B) Weighted Average Outstanding Common Stock Common Stock (existing) Common Stock Options Convertible Bonds Preferred Stock 2000000/1000 50 3000000/100*3 100000 90000 750000 Diluted Earning per share 2.12+G13/G18 21

23 (b) Basic and Diluted EPS for 2018 Basic EPS A) Net Income 26 27 28 29 30 31 32 (B) Weighted Average Outstanding Common Stock 5000000/10 Common Stock (existing) Common Stock Options 52308552308ROUND(60000 20/26*10/12+60000 6/26,) Basic Earning per share for 2018 2.17+G25/G28 Diluted EPS A) Net Income 1590000 2000000 0.08 0.75 +3000000 0.09 (B) Weighted Average Outstanding Common Stock 34 35 Common Stock (existing) Common Stock Options Convertible Bonds Preferred Stock 52308 37 100000 2000000/1000 50 90000 7423083000000/100 3 39 40 41 Diluted Earning per share 2.14+G33/G38

42 43 (c) Basic and Diluted EPS for 2018 Basic EPS 45 46 47 A) Net Income 1260000 1260000 (B) Weighted Average Outstanding Common Stock Common Stock (existing) Stock for Convertible Bonds Common Stock Options 5000000/10 2000000/1000 50*6/12 52308602308ROUND(60000 20/26*10/12+60000 6/26,) 49 50 51 52 53 54 Basic Earning per share for 2018 2.09+G45/G49 Diluted EPS A) Net Income 1530000 2000000 0.08*0.75*6/12)+3000000 0.09 (B) Weighted Average Outstanding Common Stock Common Stock (existing) Common Stock Options Convertible Bonds Preferred Stock 52308 57 58 59 2000000/1000*50*6/12 90000 6923083000000/100 3 61 Diluted Earning per share 2.21+G54/G59

63 64 (d) Amortization Schedule 65 fiii 67 68 (A) Premium on Bonds (B) Number of years 140472 2140472-2000000 10 10 Annual Amortization Figure 14047 +165/166