In: Accounting
In 2016, Ivanhoe Ltd. issued $51,000 of 7% bonds at par, with each $1,000 bond being convertible into 100 common shares. The company had revenues of $70,200 and expenses of $39,500 for 2017, not including interest and taxes (assume a tax rate of 20%). Throughout 2017, 1,000 common shares were outstanding, and none of the bonds were converted or redeemed. (For simplicity, assume that the convertible bonds’ equity element is not recorded.)
Calculate diluted earnings per share for the year ended December 31, 2017.
Calculate diluted earnings per share for the year ended December 31, 2017. Assume that the 51 bonds were issued on October 1, 2017 (rather than in 2016), and that none have been converted or redeemed.
Calculate diluted earnings per share for the year ended December 31, 2017. Assume that 15 of the 51 bonds were converted on July 1, 2017.
Calculation of Total Income
Revenue - $ 70,200
Expenses - $ 39,500
Income Before Interest and tax = $ 30,700
Less: Interest ($51,000 x 7%) $ 3,570
Income Before Tax = $ 27,130
Tax (20%) $ 5,426
Total Income = $ 21,704
1. Diluted earning per share for the year ended December 31,2017
Diluted EPS = Total Income / (Outstanding Shares + Diluted shares)
= $ 21,704 / 1000
= $21.70
2. Diluted earning per share for the year ended December 31,2017 if Bonds issued on October 1, 2017
Income Before Interest and Tax = $ 30,700
Less: Interest ($51,000 x 7% x 3/12) = $ 892.50
Income Before Tax = $ 29,807.5
Tax (20%) $ 5,961.5
Total Income = $ 23,846
Diluted EPS = Total Income / (Outstanding Shares + Diluted shares)
= $ 23,846 / 1000
= $23.85
3. Diluted earning per share for the year ended December 31,2017 if 15 of the 51 Bonds converted on July 1, 2017
Income Before Interest and Tax = $ 30,700
Less: Interest ($36,000 x 7% ) = $ 2,520
Less: Interest ($ 15,000 x 7% x 6/12) = $ 525
Income Before Tax = $ 27,655
Tax (20%) $ 5,531
Total Income = $ 22,124
Diluted EPS = Total Income / (Outstanding Shares + Diluted shares)
Diluted Shares = 1500 shares ( 1Bond = 100 shares, therefore 15 bonds = 1500 shares)
= $ 22,124 / (1000 + 1500)
= $22,124 / 2500
= 8.85