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Ignatius Corporation had 14 million shares of common stock outstanding during the current calendar year. It...

Ignatius Corporation had 14 million shares of common stock outstanding during the current calendar year. It issued 23,000, $1,000, convertible bonds on January 1. Each bond is convertible into 50 shares of common stock. The bonds were issued at face amount and pay interest semiannually at an annual rate of 11%. On June 30, Ignatius issued 230,000 shares of $100 par 6% cumulative preferred stock. Dividends are declared and paid quarterly. Ignatius has an effective tax rate of 40%. Ignatius would report the following EPS data (rounded to 2 decimal places) on its net income of $33 million:
  

Basic EPS Diluted EPS
a. $ 2.41 $ 2.18
b. $ 2.31 $ 2.23
c. $ 2.36 $ 2.18
d. $ 2.31 $ 2.32

Solutions

Expert Solution

Preference dividend ( 5 months ) = 230000*(100)*(6%)(5/12) = 575000

Interest on Bonds = 23000 * (1000) * (11%) = 2530000

EPS=

(Net income – preference dividend ) / Average outstanding shares

Net income =33000000

Basic Eps =     (33000000-575000) / 14000000

                  =    2.3160

                      = 2.31

Diluted EPS=       

Net income after giving effect to diluted share / (Average outstanding shares + Diluted shares)​

Net income after giving effect to diluted shares

   =net income- Prefrence Dividend + interest on bonds payable – (40% on interest on bonds payable)

       = 33000000-575000+2530000- (40% of (2530000)

                       =34955000-1012000

                          = 33943000

Diluted shares = no of bonds issued * (50)

                        = 23000 * 50

                           = 1150000 shares

Outstanding shares = 14000000 Shares

Total no of shares for calculating diluted eps = 14000000+1150000

                                                                     = 15150000

Diluted eps = 33943000 / 15150000

                       = 2.24046

= 2.23 approx

Option B

ekkarill92 answered 2 years ago
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