Question

In 2019, Windsor Enterprises issued, at par, 60 $1,000, 8% bonds, each convertible into 100 shares of common stock. Windsor had revenues of $17,800 and expenses other than interest and taxes of $10,000 for 2020. (Assume that the tax rate is 20%.) Throughout 2020, 1,900 shares of common stock were outstanding; none of the bonds was converted or redeemed.

(a) Compute diluted earnings per share for 2020. (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, 2020 (rather than in 2019), and none have been converted or redeemed. Compute diluted earnings per share for 2020. (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, 2020. Compute diluted earnings per share for 2020. (Round answer to 2 decimal places, e.g. $2.55.)

Earnings per share

$

Answer 1

Answer a : Earnings per share = $0.79

Explanation :

Revenue	$17,800
Less : Expense	$10,000
Less :Bond Interest (60 * 1,000 *.08)	$4,800
Income Before taxes	$3,000
Income taxes (20%)	$600
Net Income	$2,400
Add : Bond Interest * (1 - tax rate) [ $4,800 * (1- 0.20)]	$3,840
Adjusted net income	$6,240
Weighted average number of shares outstanding [1,900 shares + (60 * 100 shares)]	7.900 shares
Diluted EPS = Adjusted net income/Weighted average number of shares outstanding [$6,240 / 7.900 shares]	$0.79

Answer b : Earnings per share = $1.60

Explanation :

Revenue	$17,800
Less : Expense	$10,000
Less :Bond Interest (60 * 1,000 *.08* 4/12)	$1,600
Income Before taxes	$6,200
Income taxes (20%)	$1,240
Net Income	$4,960
Add : Bond Interest * (1 - tax rate) [ $1,600 * (1- 0.20)]	$1,280
Adjusted net income	$6,240
Weighted average number of shares outstanding [1,900 shares + (60 * 100 shares * 4/12)]	3,900 shares
Diluted EPS = Adjusted net income/Weighted average number of shares outstanding [$6,240 / 3.900 shares]	$1.60

Answer c: Earnings per share = $0.79

Explanation:

Revenue	$17,800
Less : Expense	$10,000
Less :Bond Interest [(60 * 1,000 *.08* 6/12) + (40 * 1,000 *.08* 6/12)]	$4,000
Income Before taxes	$3,800
Income taxes (20%)	$760
Net Income	$3,040
Add : Bond Interest * (1 - tax rate) [ $4,000 * (1- 0.20)]	$3,200
Adjusted net income	$6,240
Weighted average number of shares outstanding [1,900 shares + (2,000 * 6/12) + 4,000 shares + (2,000 * 6/12)]	7.900 shares
Diluted EPS = Adjusted net income/Weighted average number of shares outstanding [$6,240 / 3.900 shares]	$0.79