Exercise 16-24 Incorrect answer. Your answer is incorrect. Try again. The Martin
ID: 2329952 • Letter: E
Question
Exercise 16-24 Incorrect answer. Your answer is incorrect. Try again. The Martinez Corporation issued 10-year, $4,000,000 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 17:1. At the date of issue, the bonds were sold at 98. Bond discount is amortized on a straight-line basis. Martinez’s effective tax was 35%. Net income in 2017 was $10,950,000, and the company had 1,980,000 shares outstanding during the entire year. (a) Compute both basic and diluted earnings per share. (Round answers to 2 decimal places, e.g. $2.55.) Basic earnings per share $Entry field with incorrect answer 3.14 Diluted earnings per share $Entry field with incorrect answer 2.91 Click if you would like to Show Work for this question:
Explanation / Answer
(a) Net income for year $10,950,000
Add: Adjustment for interest (net of tax) 187,200*
$11,137,200
*Maturity value $4,000,000
Stated rate X 7%
Cash interest 280,000
Discount amortization [(1.00 – .98) X $4,000,000 X 1/10] 8,000
Interest expense 288,000
1 – tax rate (35%) X .65
After-tax interest $ 187,200
$4,000,000/$1,000 = 4,000 debentures
Increase in diluted earnings per share denominator:
4,000
X 17
68,000
Earnings per share:
Basic EPS $10,950,000 ÷ 1,980,000 = $5.53
Diluted EPS $11,137,200 ÷ 2,048,000 = $5.44
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