In 2016, Pronghorn Enterprises issued, at par, 60 $1,000, 8% bonds, each convertible into 100 shares...

In 2016, Pronghorn Enterprises issued, at par, 60 $1,000, 8% bonds, each convertible into 100 shares of common stock. Pronghorn had revenues of $18,200 and expenses other than interest and taxes of $8,400 for 2017. (Assume that the tax rate is 40%.) Throughout 2017, 2,000 shares of common stock were outstanding; none of the bonds was converted or redeemed. (a) Compute diluted earnings per share for 2017. (Round answer to 2 decimal places, e.g. $2.55.) Earnings per share $ (b) Assume the same facts as those assumed for part (a), except that the 60 bonds were issued on September 1, 2017 (rather than in 2016), and none have been converted or redeemed. Compute diluted earnings per share for 2017. (Round answer to 2 decimal places, e.g. $2.55.) Earnings per share $ (c) Assume the same facts as assumed for part (a), except that 20 of the 60 bonds were actually converted on July 1, 2017. Compute diluted earnings per share for 2017. (Round answer to 2 decimal places, e.g. $2.55.) Earnings per share $

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Expert Solution

Solution :-

( a ) :-

Particulars	Amount
Revenue	$18,200
Expenses	$8,400
Bond interest	= 60 * $1,000 * 8% = $60,000 * 0.08 = $4,800
Income before taxes	= $18,200 - $8,400 - $4,800 = $5,000
Taxes	= $5,000 * 40% = $2,000
Net income	= $5,000 - $2,000 = $3,000

Income for diluted earnings per share	= $3,000 + [ $4,800 * ( 1 - 40% ) ] = $3,000 + [ $4,800 * ( 1 - 0.40 ) ] = $3,000 + [ $4,800 * 0.60 ] = $3,000 + $2,880 = $5,880
Number of shares for diluted earnings	=6,000 + 2,000 = 8,000
Diluted earnings per share	= $5,880 / 8,000 = $0.73

( b ) :-

Particulars	Amount
Revenue	$18,200
Expenses	$8,400
Bond interest	= [ 60 * $1,000 * 8% ] * 4 / [ 12 ] = [ $60,000 * 0.08 ] * 4 / 48 = $1,600
Income before taxes	= $18,200 - $8,400 - $1,600 = $8,200
Taxes	= $8,200 * 40% = $3,280
Net income	= $8,200 - $3,280 = $4,920

Income for diluted earnings per share	= $4,920 + [ $1,600 * ( 1 - 40% ) ] = $4,920 + [ $1,600 * ( 1 - 0.40 ) ] = $4,920 + [ $1,600 * 0.60 ] = $4,920 + 960 = $5,880
Number of shares for diluted earnings	= [ 2,000 +6,000 ] / 3 = 8,000 / 3 = 2,667
Diluted earnings per share	= $5,880 / 2,627 = $2.24

( c ) :-

Particulars	Amount
Revenue	$18,200
Expenses	$8,400
Bond interest	= [ 60 * $1,000 * 8% ] * 6 / [ 12] ] + [ 40 * $1,000 * 8% ] * 6 / [ 12 ] = $2,400 + $1,600 = $4,000
Income before taxes	= $18,200 - $8,400 - $4,000 = $5,800
Taxes	= $5,800 * 40% = $2,320
Net income	= $5,800 - $2,320 = $3,480

Income for diluted earnings per share	= $3,480 + $4,000 * ( 1 - 40% ) = $3,480 + $4,000 * 0.60 = $3,480 + $2,400 = $5,880
Number of shares for diluted earnings	= [ 2,000 + 6,000 ] / 3 = 8,000 / 3 = 2667
Diluted earnings per share	= $5,880 / ( 2,000 + 6,000 ] = $5,880 / 8,000 = $0.73

ekkarill92 answered 3 months ago

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