Ramon Inc. reported net income of $300,000 for the year ended December 31, 2006.

Question

Ramon Inc. reported net income of $300,000 for the year ended December 31, 2006. Ramon Inc. had 50,000 shares of common stock outstanding throughout 2006. On January 1, 2006, Ramon Inc. issued 500, five-year, $1,000 face value bonds at par. The bonds pay 7 percent interest, and each bond can be converted into 30 shares of common stock. Assume Ramon Inc. has a 32 percent income tax rate. None of the bonds were converted in 2006.

Required: 1. Compute the basic EPS and diluted EPS for Ramon Inc. for 2006.

Explanation / Answer

Basic earning per share = 300000/50000 i.e 6 per share

Diluted earning per share = Net Income + Saving in interet net of tax/Outstanding equity shares + Potential equity shares

= 300000+(500*1000*7%*0.68)/50000+(500*30)

= 300000+23800/50000+15000

= 323800/65000 i.e 4.98 per share

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