Question

The Kindbird Corporation issued 10 year $5380000 par 7% callable convertible subordinated debentures on January 2 2017. The bonds have a par value of $1000 with interest payable annually. The current conversion ratio is 14:1 and in 2 years it will increase to 17:1. At the date of issue the bonds were sold at 99. Bond discount is amortized on a straight line basis. Kingbirds effective tax was 40%. Net income in 2017 was $9000000 and the company had 1980000 shares outstanding during the entire year.

a. compute both basic and diluted earnings per share.

basic earnings per share

diluted earnings per share

Answer 1

Answer:

Calculation of basic eaarning per share:

          Net income                   $9,000,000

Less: tax @40%           $3,600,000

Net income attributable to common stockholder    $5,400,000

Number of share outstanding =1,980,000

Basic eaarning per share = $5,400,000 / 1,980,000 = $2.73

Note: It is assumed that net income given in the question is before tax deduction.

Calculation of diluted eaarning per share:

         Net income                      $9,000,000

Add: Interest on convertible debenture       

        ($5,380,000 × 7%)                                        $376,600

Adjusted net income                                              $8,623,400

Less: tax @40%           $3,449,360

Net income attributable to common stockholder    $5,174,040

Additional number of share due to conversion of debenture = 5,380 × 14 = 75,320

Number of share outstanding =1,980,000 + 75,320 = 2,055,320

Diluted eaarning per share = $5,174,040 / 2,055,320 = $2.52