Exercise 16-25 Warning Don\'t show me this message again for the assignment Ok C
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Exercise 16-25
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Exercise 16-25
On January 1, 2017, Cheyenne Company issued 10-year, $1,880,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 14 shares of Cheyenne common stock. Cheyenne’s net income in 2017 was $294,000, and its tax rate was 40%. The company had 110,000 shares of common stock outstanding throughout 2017. None of the bonds were converted in 2017.(a) Compute diluted earnings per share for 2017. (Round answer to 2 decimal places, e.g. $2.55.)
Diluted earnings per share $
(b) Compute diluted earnings per share for 2017, assuming the same facts as above, except that $1,100,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Cheyenne common stock. (Round answer to 2 decimal places, e.g. $2.55.)
Diluted earnings per share $
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Explanation / Answer
(A) Earnings of Cheyenne Company for year 2017 = $ 294000 (EAT)
No.of convertable bonds = total vale of bond / face value
= $1880000/1000
= $1880 bonds
no of shares per convertable bond = 40 shares
total no of shares are issuble for convertable bonds = 40 * 1880 =75200
no of common stocks = 110000
so,
BASIC EPS is = TOTAL EARNING AVAILABLE TO COMON STOCK HOLDERS /NO OF COMMON STOCKS
= 294000/110000
=2.67
DILUTED EPS = TOTAL EARNINGS AVAILBLE FOR COMMON AND POTENTIAL EQUITY SHARES NO OF COMMON STOCK AFTER CONVETION
= 361680/185200
=1.95 $
Earnings(EAT) = $294000(60%)
TAX RATE = 40%
INTERST AFTER TAX = $67680 (1880000*6%*(1-0.4))
EARNINS AVAILABLE TO COMMON AND POTENTIAL EQUITY SHARE HOLDERS
= $294000+$67680
= $361680
NO OF EQUITY SHARES FOR DILUTED EPS = 110000+ 75200 = 185200
(B)
VALUE OF PREFERNTIAL CONVERTABLE STOCK = $1100000
NO OF CONVERTBLE PRE FERENTIAL SHARES = $ 1100000/100
= 11000
NO OF SHARES PER PREFENTIAL SHARES = 5
NO OF CONVERTBLE COMMON STOCK ARE ISSUED = 11000*5 =55000
TOTAL NO OF SHARES FOR DILUTED EPS = 110000+55000 = 165000 COMMON STOCK
PREFENTIAL DIVIDEND = $ 66000 (1100000*6%)
TOTAL EARNINGS FOR DILUTED EPS =$ 294000 + $66000.
= $360000
DILUTED EPS = 360000/165000
= 2.18
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