Question

 

A.	ClassCo sells Convertible Bond with warrant to convert into stock
		Bond with face	$1,000
		Face Rate	8.00%
		Term	3	Yrs.
		Market rate @ sale	8.50%
		issued:	6/30/2018
		maturity	6/30/2021
		Interest paid annually
		Bond sold for	996.00
	Part 1) determine value received from sale, Discount or Premium?
	Part 2) Prepare JE to record sale, use incremental
		assume value of Bond in the known
		and value of warrant is incremental
B.	ClassCo:		PE 12/31/2018		Fiscal = calendar Yr.
		Net income: after tax	2000			shares:
					Beginning:	505
					3/1 issue	50
					9/1 issue	60
					Treasury Purchase 10/30	(24)
					on 11/22, 3 for 1 split
					Preferred dividends this year =	250
	Part 1) Calculate EPS
	Part 2)   using "as if" compute EPS & dilutive effect of Convertible Bonds
	issued 10 bonds , $1000 bonds issued prior yr., 6%, each bond was convertible into 30 shares
		40% tax rate for bonds
C.		NET Income:	4500		No preferred stock
		Average # of Shares	2200		EPS =	2.045
		Stock Options:	all full Yr.
		# option shares	500
		0ption price per share	$18
		Market at PE being measured	$32
	Part 1	Compute dilutive effect per share

Answer 1

Answer A : Part 1
Value to be received on bond
Interest on bond		80	per annum
market rate at sale		8.50%
redemption value		1000
value of bond		80([email protected]%,3years)+1000([email protected]%,3rd year)
value of bond at		987.32
the end of 3rd year
Actual value of bond on sale is 996 (greater then value of bond) , it means bond has been sold on premium
Answer B : Part 1
Caluculation of no. of shares
beginning		505
3/1 issue		50
9/1 issue		60
treasury purchase		-24
		591
on 11/22 , 3 for 1 split		1773
then total no. of share will be			1773
Caluclation of Income for equity shareholders
Net Income		2000
Less: Prefrence Dividend		200
Income for equity shareholders		1800
No. of equity shareholders		1773
Earning per share		1.015228
Part 2:
Interest on per bond		60
Interest On total Bond 60*10		600
Each bond convert in 30 shares
Then no. of shares will be issue to bond holders		300
Calculation of EPS			(assume that it is before interest)
Net Income		2000
Less; Interest		600
Net income after interest		1400
Less:tax @ 40 %		560
Net income after interest & tax		840
Less: Prefrence Dividend		200
Earning for equity shareholders		640
no. of shares		1773
EPS		0.36097
Diluted earning per share
Earning For equity shareholders		640
no. of diluted shares		2073
Diluted earning per share		0.308731
								Answer A : Part 1 Value to be received on bond Interest on bond 80 per annum market rate at sale 8.50% redemption value 1000 value of bond 80([email protected]%,3years)+1000([email protected]%,3rd year) value of bond at 987.32 the end of 3rd year Actual value of bond on sale is 996 (greater then value of bond) , it means bond has been sold on premium Answer B : Part 1 Caluculation of no. of shares beginning 505 3/1 issue 50 9/1 issue 60 treasury purchase -24 591 on 11/22 , 3 for 1 split 1773 then total no. of share will be 1773 Caluclation of Income for equity shareholders Net Income 2000 Less: Prefrence Dividend 200 Income for equity shareholders 1800 No. of equity shareholders 1773 Earning per share 1.015228 Part 2: Interest on per bond 60 Interest On total Bond 60*10 600 Each bond convert in 30 shares Then no. of shares will be issue to bond holders 300 Calculation of EPS (assume that it is before interest) Net Income 2000 Less; Interest 600 Net income after interest 1400 Less:tax @ 40 % 560 Net income after interest & tax 840 Less: Prefrence Dividend 200 Earning for equity shareholders 640 no. of shares 1773 EPS 0.36097 Diluted earning per share Earning For equity shareholders 640 no. of diluted shares 2073 Diluted earning per share 0.308731