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In 2016, Blossom Ltd. issued $45,000 of 7% bonds at par, with each $1,000 bond being...

In 2016, Blossom Ltd. issued $45,000 of 7% bonds at par, with each $1,000 bond being convertible into 100 common shares. The company had revenues of $79,800 and expenses of $43,300 for 2017, not including interest and taxes (assume a tax rate of 20%). Throughout 2017, 1,800 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 45 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 7 of the 45 bonds were converted on July 1, 2017.

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Answer #1

Diluted EPS for 2016 :

earnings before tax = 79800- 43300- 7*45000/100= 33350$

Earnings after tax = 33350- 6670= 26680$.

When no bonds are converted or convertible bond's equity is not recorded diluted EPS= 26680/1800= 14.822$

When bonds are issued on Oct 2017, no convertible equity element is considered in weighted avg. Shares

Diluted EPS= 26680/1800= 14.822$

Diluted EPS if 7 bonds were converted in 2017

26680+ 245$(interest on 7 bonds for half year)/ 1800+ 3.5= 14.52$

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