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The Novak Corporation issued 10-year, $5,980,000 par, 6% callable convertible subordinated debentures on January 2, 2017....

The Novak Corporation issued 10-year, $5,980,000 par, 6% callable convertible subordinated debentures on January 2, 2017. The bonds have a par value of $1,000, with interest payable annually. The current conversion ratio is 15:1, and in 2 years it will increase to 17:1. At the date of issue, the bonds were sold at 96. Bond discount is amortized on a straight-line basis. Novak’s effective tax was 35%. Net income in 2017 was $7,700,000, and the company had 1,845,000 shares outstanding during the entire year. (a) Compute both basic and diluted earnings per share. (Round answers to 2 decimal places, e.g. $2.55.) Basic earnings per share $ Diluted earnings per share $

Expert Solution

(a) Net income for year................................................................................................ $7,700,000

Add: Adjustment for interest (net of tax)............................................................ 248,768*

$7,948,768

*Maturity value.................................................................................................................... $5,980,000

Stated rate.......................................................................................................................... X 6%

Cash interest........................................................................................................................... 358,800

Discount amortization [(1.00 – .96) X $5,980,000 X 1/10]............................................. 23,920

Interest expense...................................................................................................................... 382,720

1 – tax rate (35%).............................................................................................................. X .65

After-tax interest................................................................................................... $ 248,768

$5,980,000/$1,000 = 5,980 debentures

Increase in diluted earnings per share denominator:

5,980

X 17

101,660

Earnings per share:

Basic EPS $7,700,000 ÷ 1,845,000 = $4.17

Diluted EPS $7,948,768 ÷ 1,946,660 = $4.08

ekkarill92 answered 2 years ago

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