Question

The Simon Corporation issued 10-year, $5,000,000 par, 7% callable convertible subordinated debentures on January 2, 2020. The bonds have a par value of $1,000, with interest payable annually. The current conversion ratio is 14:1, and in 2 years it will increase to 18:1. At the date of issue, the bonds were sold at 98. Bond discount is amortized on a straight-line basis. Simon’s effective tax was 20%. Net income in 2020 was $9,500,000, and the company had 2,000,000 shares outstanding during the entire year.

Discuss how the schedule would differ if the security was convertible preferred stock.

Answer 1

In here
basic earning per share = 9500000 / 2000000 = 4.75

maturity value = 5000000 * 7% = 350000 interest

Assume that ,it is 10 years bonds,so calculate

discount amortization [ ( 1 -.0.98) * 5000000 *1/10] = 10000

interest expense = 350000 + 10000 = 360000

1 -tax rate 20% = 360000 *80% = 288000

288000 + 9500000 = 9788000

debentures = 5000000 / 1000 = 5000

In here 18 is the highest conversion ratio(18:1)

5000 * 18 = 90000

diluted earning pershare = 9788000 / ( 2000000 + 90000) = 4.68