In 2013, Chirac Enterprises issued, at par, 75 $1,050, 8% bonds, each convertibl

Question

In 2013, Chirac Enterprises issued, at par, 75 $1,050, 8% bonds, each convertible into 140 shares of common stock. Chirac had revenues of $20,400 and expenses other than interest and taxes of $8,740 for 2014. (Assume that the tax rate is 40%.) Throughout 2014, 2,740 shares of common stock were outstanding; none of the bonds was converted or redeemed.

(a) Compute diluted earnings per share for 2014. (Round answer to 2 decimal places, e.g. $2.55.)
Earnings per share $___________

(b) Assume the same fasts as those assumed for part (a), except that the 75 bonds were issued on September 1,2014 (rather than in 2013), and none have been converted or redeemed.
Earnings per sare $____________

(c) Assume the same facts as assumed for part (a), except that 25 of the 75 bonds were actually converted on July 1, 2014.
Earnings per share $____________

Explanation / Answer

Answer a Computation of profit attributable to common stockholders Revenues $20,400.00 Less : Expenses $8,740.00 Less : Interest ($1050 * 8%) $84.00 Profit before taxes $11,576.00 Less : tax @ 40% $4,630.40 Profit attributable to Common stockholders $6,945.60 Diluted earning per share = (Profit attributable to common stokholders + After tax interest on convertible bond) / (Common shares oustanding during the period + All dilutive potential common stock) After tax interest on bond = $84 * 60% = $50.40 Common shares oustanding during the period = 2740 shares All dilutive potential common stock = 75 bonds * 140 shares = 10500 shares Diluted earning per share = ($6945.60 + 50.40) / (2740 + 10500) = $6996 / 13240 = 0.53 per share Answer b Computation of profit attributable to common stockholders Revenues $20,400.00 Less : Expenses $8,740.00 Less : Interest [ ($1050 * 8%) / 12 * 4] $28.00 Profit before taxes $11,632.00 Less : tax @ 40% $4,652.80 Profit attributable to Common stockholders $6,979.20 Earning per share = Profit attributable to Common stockholders / Common shares oustanding during the period Earning Per share = $6979.20 / 2740 = $2.55 per share Answer c Computation of profit attributable to common stockholders Revenues $20,400.00 Less : Expenses $8,740.00 Less : Interest ( as per working) $70.00 Profit before taxes $11,590.00 Less : tax @ 40% $4,636.00 Profit attributable to Common stockholders $6,954.00 Earning per share = Profit attributable to Common stockholders / Common shares oustanding after bond conversion Earning Per share = $6954 / 6240 = $1.11 per share Working Value per bond = $1050 / 75 = $14 per bond Interest for 2014 on 25 bonds converted to shares on July 1,2014 = [(25 * $14) * 8% / 12] * 6 = $14 Interest for 2014 on remaining 50 bonds = (50 * $14) * 8% = $56 Common shares outstanding = 2740 shares + (25 bonds * 140 shares) = 6240 shares

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