Brief Exercise 17-16 Wildhorse Corporation reported net income of $330,000 in 20

Question

Brief Exercise 17-16 Wildhorse Corporation reported net income of $330,000 in 2017 and had 740,000 common shares outstanding throughout the year. On May 1, 2017, wildhorse issued 5% convertible bonds. Each $1,000 bond is convertible into 120 common shares. Total proceeds at par amounted to $1,140,000, and was allocated to the liability and equity components under the residual value method. The liability component was measured first, at present value of the stream of interest payments plus present value of the bond maturity value, all discounted at 9% (the interest rate that applies to similar straight bonds). At the time of issuance, the liability component was recorded at $1,063,685. Wildhorse's tax rate is 30% Calculate Wildhorse's 2017 diluted earnings per share. (Round answer to 2 decimal places, e.g. 15.25.) Earnings per share

Explanation / Answer

earning per share = net income / no of share outstanding = $3,30,000/7,40,000 = 0.4459 or 0.45

EPS will be $0.45.

NOW CALCULATING THE DILUTED EPS,

weighted avg no of shares outstanding:

common shares = 7,40,000 (12/12) = 7,40,000

5% convertable bonds= (($1,140,000/1000)*120 ) (8/12)= 1,36,800

NO OF SHARES OUTSTANDING = 740000+136800 = 8,76,800

NET INCOME = $3,30,000 + ($1,140,000 *5%) (1-0.30) (8/12) = $3,56,600

DILUTED EPS= $3,56,600/ 876800= 0.41 per share

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