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In: Accounting

During 2016, Sanchez, Inc. had the following convertible securities outstanding: $220,000 of 10%, $100 par, cumulative...

During 2016, Sanchez, Inc. had the following convertible securities outstanding:

  1. $220,000 of 10%, $100 par, cumulative preferred stock. Each share is convertible into 5 shares of common stock.
  2. $200,000 of 9.5% convertible bonds. Each $1,000 bond is convertible into 45 shares of common stock.
  3. $100,000 of 8% convertible bonds. Each $1,000 bond is convertible into 32 shares of common stock.
  4. $150,000 of 11%, $100 par, cumulative preferred stock. Each share is convertible into 5 shares of common stock.

Sanchez, Inc. has an income tax rate of 40%.

Required:

  1. Prepare a schedule that lists the impact of the assumed conversion of each convertible security on diluted earnings per share.
  2. Prepare a ranking of the order in which the securities would be included in the diluted earnings per share calculations.

Please do not copy from Chegg otherwise I have to report the answer. Explain the answer throughly by showing each step of the calculation.

Solutions

Expert Solution

Calculation of Impact of Conversion and Ranking for Dilution Test
Particular numerator ( Divident or Interest) before Tax Tax @40% numerator after Tax Denominator Incremental EPS or Impact of Conversion (3 /4) Ranking
1 2 3 4 5
Preferred Stock $ 22,000.00 $     8,800.00 $ 13,200.00        11,000.00 $           1.20 I
Convertible Bond $ 19,000.00 $     7,600.00 $ 11,400.00          9,000.00 $           1.27 II
Convertible Bond 8% $     8,000.00 $     3,200.00 $     4,800.00          3,200.00 $           1.50 IV
Cumulative Prefferred Stock $ 16,500.00 $     6,600.00 $     9,900.00          7,500.00 $           1.32 III
Note : I have assumed divident is also taxable @40 %
If you assume it is taxable at Some other rate , please make the changes in Tax Coloumn and

make your calculation be revised Numerator after Tax.

Note 2: Incremental EPS that is increase in EPS has been taken upto two decimal places.
Working Note
Preferred Stock
Divident =220000X10%
= 22000
No of Shares after Conversion = 220000/100 X 5
=       11,000.00
Convertible Bond 9.5%
Interest =200000X9.5%
$ 19,000.00
No of Shares after Conversion = 200000/1000 X 45
=         9,000.00
Convertible Bond 8%
Interest =100000X8%
$     8,000.00
No of Shares after Conversion = 100000/1000 X 32
=         3,200.00
Cumulative Prefferred Stock
Divident =150000X11%
$ 16,500.00
No of Shares after Conversion = 150000/100 X 5
=         7,500.00

ekkarill92 answered 2 years ago
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