The Pharoah Corporation issued 10-year, $4,310,000 par, 7%
callable convertible subordinated debentures on January 2, 2017.
The bonds have a par value of $1,000, with interest payable
annually. The current conversion ratio is 13:1, and in 2 years it
will increase to 19:1. At the date of issue, the bonds were sold at
98. Bond discount is amortized on a straight-line basis. Pharoah’s
effective tax was 35%. Net income in 2017 was $7,900,000, and the
company had 2,120,000 shares outstanding during the entire
year.
(a) Compute both basic and diluted earnings per share
Calculation Income for year :-
Net Income for year = $7900000
Add : Adjustment for interest = $201708
Total Income = $8101708
Calculation for Adjustment for interest :-
Particulars | Amount($) |
Cash Interest ($4310000*7%) | 301700 |
Discount amortization($4310000*(1-0.98)*(1/10)) | 8620 |
Interest Expense ($301700+$8620) | 310320 |
Interest After Tax ($310320*(1-0.35)) | 201708 |
No. of Debentures = $4310000/1000 = 4310 Debentures
Increase in diluted shares = 4310*19 = $81890
Calculation for EPS :-
Basic EPS = $7900000 / 2120000 shares
= $3.726 or $3.73
DEPS = $8101708 / (2120000+81890)
= $8101708 / 2201890 shares
= $3.679 or $3.68
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