5. The following information was taken from the books and records of Simonic, In

Question

5. The following information was taken from the books and records of Simonic, Inc.:

(i) Net Income $ 560,000

(ii) Capital structure:

(a) Convertible 6% bonds. Each of the 300 $1,000 bonds is convertible into 50 shares of common stock at the present date and for the next 10 years. $ 300,000

(b) $10 par common stock, 200,000 shares issued and outstanding during the entire year. $2,000,000

(c) Stock options outstanding to buy 16,000 shares of common stock at $20 per share.

(iii) Other information:

(a) Bonds converted during the year NONE

(b) Income tax rate 30%

(c) Average market price per share of common stock during year $32

(d) Warrants were outstanding the entire year

(e) Warrants exercised during the year NONE

REQUIRED:

(a) Compute diluted earnings per share.

Explanation / Answer

Simonic Inc Ans) Net Income $      560,000.00 300 6% convertible bonds@1000 converted into 50 shares of common stock at the present date for next 10 years $      300,000.00 200000 shares of $10 common stock outstandng $ 2,000,000.00 Share warrants outstanding to buy 16000 shares of common stock 20 each a Calculation of Basic earning per share Income applicable to common stock holders $      560,000.00 Weighted average of common stock outstanding 200000 Basic earning per share $                   2.80 b(1) Interest expense for year (=c5*6%) $        18,000.00 Income tax deduction due to interest $          5,400.00 Interest expense avoided(Net of tax) $        12,600.00 Number of common stock converted into bonds $        15,000.00 Per share effect= $                   0.84 b(2) Number of shares under warrant 16000 Warrant price per share $                20.00 Amount received on issue of warrants 320000 Average market price per share of common stock during year (Given) $                32.00 Average 2004 market price of common 10000 Excess of shares unde option over treasury shares that should be repurchased 6000 Per share effect 0 Ranking of per share effect As per b(1) $                   0.84 As Per b(2) 0 Fully diluted earning per share computation 1 Warrants Net income applicable to common stock shareholders $      560,000.00 Add: Incremental effect of warrants 0 Total $      560,000.00 Weighted average number of common stock outstanding 200000 Incremental denominator effect of warrant 6000 Total 206000 Recomputed EPS $                   2.72 Conversion of warrants causes diluted Eps to fall from $2.80 to $2.72 2 6% convertible bonds Net income applicable to common stock holders including incremental effect $      560,000.00 Add Interest expense avoided $        12,600.00 Total $      572,600.00 Weighted average number of common stock outstanding including incremental effect 206000 Add: Number of common stock issued upon conversion of bonds 15000 Total 221000 Recomputed EPS $                   2.59 Bonds conversion further reduces EPS from $2.72 to $2.59

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