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The Pharoah Corporation issued 10-year, $4,310,000 par, 7% callable convertible subordinated debentures on January 2, 2017....

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

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Answer #1

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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