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On January 2, 2019, Gino Co. issued at par $200,000 of 9% convertible bonds. Each $1,000...

On January 2, 2019, Gino Co. issued at par $200,000 of 9% convertible bonds. Each $1,000 bond is convertible into 20 shares. No bonds were converted during 2019. Gino had 50,000 shares of common stock outstanding during 2019. Gino's 2019 net income was $150,000 and the income tax rate was 25%. Compute Gino's EPS and diluted earnings per share for 2019 (rounded to the nearest penny). Show all computations

Solutions

Expert Solution

Earnings per Share(EPS) is the amount of Comapny's Profit per share basis. Basic EPS does not take into effect the dilutive effects.

EPS= Earnings attributable to Equity Share Holders/ Weighted Average Outstanding Equity Shares

Diluted EPS is a calculation used to gauge the Company's Earnings per Share had all the convertible options been exercised by convertible security holders.

Diluted EPS = [Earnings attributable to Equity Share Holders (after effect of potential Equity shares)] / [(Weighted Average Outstanding Equity Shares (after effect of potential Equity shares)]

As per the Question, Gino Co. had issued at par $200,000 of 9% convertible bonds. Each $1,000 bond is convertible into 20 shares. Therefore the potential equity shares are 54,000 (50,000+4,000).

Calculation of Basic EPS

Net Income of Gino Co. is $1,50,000 and income tax is 25%.

Income Attributable to Equity Share Holders' = $1,12,500 (150000-25% of 150000)

Basic EPS= $1,12,500/50,000 = $ 2.25

Calculation of Diluted EPS

Net income of Gino Co. (excluding the interest on convertible bonds and tax)= Actual Net Income + Interest paid on such bonds

Net Income (excluding the interest on convertible bonds and tax) = $1,50,000 + $ 18,000 (9% of $ 2,00,000) = $ 1,68,000

Income After Tax = $ 1,26,000 ($1,68,000 - 25% of $1,68,000)

Diluted EPS = $1,26,000/54,000 = $ 2.33

(Note: The net income in question is assumed after deduction of interest on convertible bonds but before tax)

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ekkarill92 answered 1 year ago
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