The following information was taken from the books and records of Ludwick, Inc.:
ID: 2490413 • Letter: T
Question
The following information was taken from the books and records of Ludwick, Inc.:
1. Net Income $417,000
2. Capital Structure
a. Convertible 6% bonds. Each of the 320, $1,000 bonds is convertible into 50 shares of common stock at the present date and for the next 10 years. 320,000
b. $10 par common stock, 200,000 shares issued and outstanding during the entire year. 2,000,000
c. Stock warrants outstanding to buy 15,200 shares of common stock at $20 per share.
3. Other Information:
a. Bonds converted during the year None
b. Income tax rate 30%
c. Convertible debt was outstanding the entire year
d. Average market price per share of common stock during the year $32
e. Warrants were outstanding the entire year
f. Warrants exercised during the year None
Compute diluted earnings per share.
Explanation / Answer
NI applicable to CS shareholders 417000 Weighted average number of CS outstanding 200000 Basic EPS =Net Income /Share Outstanding =417000/200000 2.09 Interest expense for year (6% * 320,000) 19200 Income tax deduction due to interest 5760 Interest expense avoided (Net of tax) 13440 Number of CS issued assuming conversion of bonds 320*50 16000 Per share effect =13440/16000 0.84 Number of shares under warrant 15200 Warrant price per share 20 Proceeds upon assumed exercise of warrants 304000 Average 2004 market price of common $32 Treasury shares that could be acquired with proceeds 304000/32 9500 Excess of shares under option over treasury share that could be repurchased 15200-9500 5700 Per share effect: 0/5700 0 1) Warrants NI applicable to CS shareholders 417000 Add: incremental numerator effect of warrants 0 Total 417000 Weighted average number of CS outstanding 200000 Add: incremental denominator effect of warrants 5700 Total 205700 Recomputed EPS (417,000/205,700) 2.03 2) 6% convertible bond Numerator from previous calculation 417000 Interest expense avoided (Net of tax) 13440 Total 430440 Denominator from previous calculation 205700 Number of CS issued assuming conversion of bonds 320*50 16000 Total 221700 Recomputed EPS (221700/430440) 1.94 Bond conversion further reduces EPS from $2.09 to 1.94. This is “fully diluted” EPS.
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