In 2013, Chirac Enterprises issued, at par, 75 $1,110, 7% bonds, each convertibl

Question

In 2013, Chirac Enterprises issued, at par, 75 $1,110, 7% bonds, each convertible into 150 shares of common stock. Chirac had revenues of $19,900 and expenses other than interest and taxes of $9,210 for 2014. (Assume that the tax rate is 40%.) Throughout 2014, 3,430 shares of common stock were outstanding; none of the bonds was converted or redeemed.

(a) Compute diluted earnings per share for 2014. (Round answer to 2 decimal places, e.g. $2.55.)

(b) Assume the same facts as those assumed for part (a), except that the 75 bonds were issued on September 1, 2014 (rather than in 2013), and none have been converted or redeemed. (Round answer to 2 decimal places, e.g. $2.55.)

(c) Assume the same facts as assumed for part (a), except that 25 of the 75 bonds were actually converted on July 1, 2014. (Round answer to 2 decimal places, e.g. $2.55.)

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Explanation / Answer

(a) Compute diluted earnings per share for 2014. (Round answer to 2 decimal places, e.g. $2.55.) Earnings per share $           0.85 Diluted Earnings Per Share = (Revenues - Expenses - Interest - Taxes) / No. of shares outstanding The earnings for Chirac Enterprises are ($ 19,900 - $ 9,210 - (75 X $ 1,110 X 7%)) X 60% = $ 2,917.50 Hence, the earnings per share will be $ 2,917.50 / 3,430 (b) Assume the same facts as those assumed for part (a), except that the 75 bonds were issued on September 1, 2014 (rather than in 2013), and none have been converted or redeemed. (Round answer to 2 decimal places, e.g. $2.55.) Earnings per share $           1.53 Diluted Earnings Per Share = (Revenues - Expenses - Interest - Taxes) / No. of shares outstanding The earnings for Chirac Enterprises are ($ 19,900 - $ 9,210 - (75 X $ 1,110 X 7%X 4/12)) X 60% = $ 5,248.50 Hence, the earnings per share will be $ 5,248.50 / 3,430 (c) Assume the same facts as assumed for part (a), except that 25 of the 75 bonds were actually converted on July 1, 2014. (Round answer to 2 decimal places, e.g. $2.55.) Earnings per share $           0.66 Diluted Earnings Per Share = (Revenues - Expenses - Interest - Taxes) / No. of shares outstanding The earnings for Chirac Enterprises are ($ 19,900 - $ 9,210 - ((25 X $ 1,110 X 7%X 6/12)+ (50 X $ 1,110 X 7%)) X 60% = $ 3,500.25 The no. of shares outstanding will be 3,430 shares for the full year 25 bonds X 150 shares of common stock valid for 6 months = 3,750/2 = 1,875 shares converted Total no. of shares outstanding = 3,430 + 1,875 = 5,315 Hence, the earnings per share will be $ 3,500.25 /5,315

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