The Riverbed Corporation issued 10-year, $5,390,000 par, 7% callable convertible

Question

The Riverbed Corporation issued 10-year, $5,390,000 par, 7% callable convertible subordinated debentures on January 2, 2017. The bonds have a par value of $1,000, with interest payable annually. The current conversion ratio is 13:1, and in 2 years it will increase to 16:1. At the date of issue, the bonds were sold at 97. Bond discount is amortized on a straight-line basis. Riverbed’s effective tax was 40%. Net income in 2017 was $10,350,000, and the company had 2,170,000 shares outstanding during the entire year.

(a) Compute both basic and diluted earnings per share. (Round answers to 2 decimal places, e.g. $2.55.)

Explanation / Answer

Net income for year                                                        $10,350,000

Add: Adjustment for interest (net of tax) $236,082*

                                                                                        $10,586,082

*Maturity value                                                                $5,390,000

Stated rate X 7%

Cash interest                                                                      377,300

Discount amortization

[(1.00 – .97) X $5,390,000 X 1/10]                                       16,170

Interest expense 393,470

1 – tax rate (40%) X .60

After-tax interest $236,082

$5,390,000/$1,000 = 5,390 debenture

Increase in diluted earnings per share denominator: 5,390 x 16=86,240

Earnings per share:

Basic EPS $10,350,000 ÷ 2,170,000 = $4.77

Diluted EPS $$10,586,082 ÷ 2,256,240 = $4.69

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