Online Network Inc. has a net income of $500,000 in the current fiscal year. There are...

Online Network Inc. has a net income of $500,000 in the current fiscal year. There are 100,000 shares of common stock outstanding along with convertible bonds, which have a total face value of $1.2 million. The $1.2 million is represented by 1,200 different $1,000 bonds. Each $1,000 bond pays 4 percent interest. The conversion ratio is 20. The firm is in a 20 percent tax bracket.

. Compute basic earnings per share.

Compute diluted earnings per share

Expert Solution

a) Basic EPS =Net income /Number of common stock outstanding

= 500000/ 100000

= $ 5 per share

b)Number of shares issued for bond conversion = 1200 *20 = 24000 shares

Total number of shares outstanding after conversion = 100000+24000 = 124000 shares

.Interest on bond = 1,200,000*.04 = 48000

After tax interest = 48000 (1-.20) = 38400

Dilutive EPS = [net income+ after tax interest saved if conversion takes place]/Total number of shares outstanding after conversion

= [500000+38400]/124000

= 538400/124000

= $ 4.34 per share

***A security is said to be Dilutive ,if conversion of which causing basic EPS to fall

jeff jeffy answered 1 year ago

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