Question

In 2019, Marigold Enterprises issued, at par, 60 $1,000, 8% bonds, each convertible into 100 shares of common stock. Marigold had revenues of $16,000 and expenses other than interest and taxes of $6,700 for 2020. (Assume that the tax rate is 20%.) Throughout 2020, 2,400 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

a) calculation of diluted EPS :

diluted EPS = adjusted net income/weighted average number of share outstanding :

calaculation of revenue

revenue	$16000
less : expenses	-6700
less : bond interest (60 x $1000 x 0.08)	-4800
income before tax	$4500
less : tax @ 20%	-900
net income after tax	$3600

weighted average number of share outstanding = (2400 shares x 12/12) + (60 bonds x 100 shares of common stock) = 2400 + 6000 = 8400 shares of common stock

diluted EPS = ($3600 + (1 - 0.20)$4800)/8400 = $0.8857 or $0.89

b) calculation of diluted EPS :

calaculation of revenue

revenue	$16000
less : expenses	-6700
less : bond interest (60 x $1000 x 0.08 x 4/12)	-1600
income before tax	$7700
less : tax @ 20%	-1540
net income after tax	$6160

weighted average number of share outstanding = (2400 shares x 12/12) + (60 bonds x 100 shares of common stock x 4/12) = 2400 + (6000 x 4/12) = 4400 shares of common stock

diluted EPS = ($6160 + (1 - 0.20)$1600)/4400 = $1.6909 or $1..69

c) calculation of diluted EPS :

calaculation of revenue

revenue	$16000
less : expenses	-6700
less : bond interest (60 x $1000 x 0.08 x 6/12)	-2400
less : bond interest (40 x $1000 x 0.08 x 6/12)	-1600
income before tax	$5300
less : tax @ 20%	-1060
net income after tax	$4240

weighted average number of share outstanding = (2400 shares x 12/12) + (20 bonds x 100 shares of common stock x 6/12) + (40 bonds x 100 shares of common stock x 12/12) + (20 bonds x 100 shares of common stock x 6/12) = 2400 + (2000 x 6/12) + (4000 x 12/12) + (2000 x 6/12) = 8400 shares of common stock

diluted EPS = ($4240 + (1 - 0.20)($2400 + $1600)/8400 = $0.8857 or $0.89

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