The Simon Corporation issued 10-year, $5,780,000 par, 7% callable convertible su

Question

The Simon Corporation issued 10-year, $5,780,000 par, 7% callable convertible subordinated debentures on January 2, 2014. The bonds have a par value of $1,000, with interest payable annually. The current conversion ratio is 15:1, and in 2 years it will increase to 20:1. At the date of issue, the bonds were sold at 97. Bond discount is amortized on a straightline basis. Simon’s effective tax was 37%. Net income in 2014 was $7,635,000, and the company had 2,455,000 shares outstanding during the entire year.

Compute both basic and diluted earnings per share.

Explanation / Answer

Calculation of Discount on Issue of 7% Callable Convertible Bonds No Of Bonds Issued 5780 Par Value @$1000 per Bond $5,780,000 Bonds Sold at 97 $5,606,600 Discount on Issue of Bonds $173,400 Discount is amortized on Straight Line Method and to amotized in 10 Years Amt. of Discount Amortized per Annum $17,340 Assumption 1. Net Income given in the Question is Before Interest & Tax. 2. Amount of Discount amortized is not deducted from Net Profit. Net Income $7,635,000 Less: Amortization of Discount on Bonds $17,340 Less: Interest on Bonds $404,600 Net Income before Tax $7,213,060 Less: Tax @ 37% $2,668,832 Net profit After Tax $4,544,228 Basic Earning per Share = Net Profit After Tax / No of Shares Outstanding Basic Earning per Share = $4544228 / 2455000 shares = $1.85 per Share Diluted Earnings = (Net Income After Tax + Interest Exp. On convertible Bonds After Tax) / (Shares + Other Convertble Instruments) Net income After Tax $4,544,228 Add: Interest Exp After Tax $271,082 Less: Discount Amount to be Amortized after Tax -116178 Adjuted Net Income After Tax $4,699,132 No of shares Outstanding 2455000 No. of Shares issued against Convertible Bonds 86700 Total No. Of Shares 2541700 Diluted Earnings = $4699132 / 2541700 = $1.85 per share

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