In 2016, Buffalo Enterprises issued, at par, 60 $1,000, 9% bonds, each convertib

Question

In 2016, Buffalo Enterprises issued, at par, 60 $1,000, 9% bonds, each convertible into 100 shares of common stock. Buffalo had revenues of $17,100 and expenses other than interest and taxes of $8,100 for 2017. (Assume that the tax rate is 40%.) Throughout 2017, 2,400 shares of common stock were outstanding; none of the bonds was converted or redeemed.

(a) Compute diluted earnings per share for 2017

(b) Assume the same facts as those assumed for part (a), except that the 60 bonds were issued on September 1, 2017 (rather than in 2016), and none have been converted or redeemed. Compute diluted earnings per share for 2017

(c) Assume the same facts as assumed for part (a), except that 20 of the 60 bonds were actually converted on July 1, 2017. Compute diluted earnings per share for 2017

Explanation / Answer

Diluted EPS = Earnings after Tax ( Excluding Interest ) / (Outstanding shares + Convertible Bonds)

1. Earnings after tax (Excluding Interest) = (17100 - 8100)*0.6 = 5400

Outstanding & Convertible shares = 2400 + (60*100) = 8400

Diluted EPS = 5400 / 8400

Diluted EPS = 0.643 per share

2. Outstanding shares & convertible bonds = 2400 + (6000*4/12) = 4400

Diluted EPS = 5400 / 4400 = 1.227 per share

3. Outstanding shares & convertible bonds -

Shares = (2400 + 20*100*6/12) = 3400

Convertible bonds = 40*100 + 20*100*6/12 = 5000

Total = 3400 + 5000 = 8400

Diluted EPS = 5400 / 8400

Diluted EPS = 0.643

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