Question

Throughout Year 7, Bob the Builder has 400,000 common shares outstanding (no preferred shares issued or outstanding). In addition, at December 31, Year 7, Bob has 5,000 convertible bonds outstanding with 20-year maturity, $1,000 face value, 7% coupon payable once a year, issued at par in Year 2. Each $1,000 bond is convertible into 20 common shares after June 30, Year 5. Bob reported net income of $600,000 for Year 7. Their income tax rate is 30%. For simplicity, please assume that the entire proceed from the sale of bonds was allocated to bonds at the issuance of the bonds.

(1) Calculate basic EPS for Year 7. [6 marks]

Answer 1

Basic EPS of Year 7	Amount($)
EBIT(Net Income)	600,000
Interest on Bond	350,000
Profit Before Tax	250,000
Tax (30%)	75,000
Profit after Tax	175,000
No. of Outstanding shares	400000
Basic EPS of Year 7	0.4375

Note:- It is mentioned that Bonds are convertable in to Shares after Year 5 but it is not mentioned that bonds are converted,Therefore Bonds are not converted until year 7.

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