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    lynette1259's Avatar
    lynette1259 Posts: 4, Reputation: 1
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    #1

    Aug 7, 2006, 07:43 PM
    Earnings Per Share: Stocks
    I have to do this problem, and I am so confused. Please help if you know about stocks.

    If I had 370,000 shares of $20 par common stock outstanding. January, 2,000, 8% bonds were issued with maturity value of $1,000 each. To have a better bond sale, I offer a conversion of 50 shares of common stock for each bond at option of purchaser. Net Income was $464,000. Income tax rate is 30%. Compute diluted earnings per share of common stock.
    CaptainForest's Avatar
    CaptainForest Posts: 3,645, Reputation: 393
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    #2

    Aug 7, 2006, 09:28 PM
    Quote Originally Posted by lynette1259
    I have to do this problem, and I am so confused. Please help if you know about stocks.

    If I had 370,000 shares of $20 par common stock outstanding. January, 2,000, 8% bonds were issued with maturity value of $1,000 each. To have a better bond sale, I offer a conversion of 50 shares of common stock for each bond at option of purchaser. Net Income was $464,000. Income tax rate is 30%. Compute diluted earnings per share of common stock.

    Basic EPS = Net Income / Total Shares = $464,000 / 370,000 shares = $1.25

    Diluted EPS:

    Bonds:
    Numerator: Do not have to pay interest.

    Pre tax Interest saved = 2,000 x $1,000 x 0.08 = $160,000

    After Tax Interest saved = $160,000 x 0.70 = $112,000

    Numerator = 464,000 + 112,000 = $576,000


    Denominator:
    Shares Added = 50 shares x 2,000 bonds = 100,000 shares

    Denominator = 370,000 + 100,000 = 470,000 shares

    Diluted EPS
    Bonds = $576,000 / 470,000 shares = $1.23
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