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In 2019, Pharoah Enterprises issued, at par, 60 $1,000, 8% bonds, each convertible into 100 shares...

In 2019, Pharoah Enterprises issued, at par, 60 $1,000, 8% bonds, each convertible into 100 shares of common stock. Pharoah had revenues of $18,800 and expenses other than interest and taxes of $8,000 for 2020. (Assume that the tax rate is 20%.) Throughout 2020, 1,800 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

$

Solutions

Expert Solution

Answer a)

Answer b)

Answer c)

Calculation Particulars Revenue Less : Other Expenses Less : Bond Interest Income Before Taxes Less : Taxes Net Income (60-$1000*8%) Amount 18,800 -8000 -4800 6,000 -1200 4,800 ($6,000*20%) 8,640 Diluted Earning (Net Income + (1-Tax Rate)*(Bond Interest) (4,800 + (1-20%)*(4,800) Weighted Shares Common Stock Outstanding + Converted Shares) (1800 Shares +6,000) Diluted Earning Per share ( Diluted Earning/Weighted Shares $8,640/7,800 Shares 7,800 1.11

Calculation Particulars Revenue Less : Other Expenses Less : Bond Interest Income Before Taxes Less : Taxes Net Income (60-$1000*8%*4/12) Amount 18,800 -8000 - 16000 9,200 -1840 7,360 ($9,200*20%) 8,640 Diluted Earning (Net Income + (1-Tax Rate)*(Bond Interest) (7,360+ (1-20%)*(1,600) Weighted Shares (Common Stock Outstanding + Converted Shares) (1800 Shares + 6,000*4/12) Diluted Earning Per share ( Diluted Earning/Weighted Shares $8,640/3,800 Shares 3,800 2.27

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Calculation Particulars Revenue Less : Other Expenses Less : Bond Interest Income Before Taxes Less : Taxes Net Income (60-$1000*8%*4/12) Amount 18,800 -8000 - 16000 9,200 -1840 7,360 ($9,200*20%) 8,640 Diluted Earning (Net Income + (1-Tax Rate)*(Bond Interest) (7,360+ (1-20%)*(1,600) Weighted Shares (Common Stock Outstanding + Converted Shares) (1800 Shares + 6,000*4/12) Diluted Earning Per share ( Diluted Earning/Weighted Shares $8,640/3,800 Shares 3,800 2.27

Calculation Particulars Revenue Less: Other Expenses Less : Bond Interest Income Before Taxes Less : Taxes Net Income (60-$1000*8%*1/2) +(40*$1000*8%*1/2) Amount 18,800 -8000 -4000 6,800 - 1360 5,440 ($6,800*20%) 8,640 Diluted Earning (Net Income + (1-Tax Rate)*(Bond Interest) (5,440 + (1-20%)*(4000) Weighted Shares (Common Stock Outstanding + Converted Shares) (1800 )+(2000*1/2Year ) + 4000 +(2000*1/2) Diluted Earning Per share ( Diluted Earning/Weighted Shares $8,000/7,800 Shares 7,800 1.11


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