In 2013, Chirac Enterprises issued, at par, 75 $1,030, 7% bonds, each convertibl

Question

In 2013, Chirac Enterprises issued, at par, 75 $1,030, 7% bonds, each convertible into 130 shares of common stock. Chirac had revenues of $18,300 and expenses other than interest and taxes of $9,150 for 2014. (Assume that the tax rate is 40%.) Throughout 2014, 2,250 shares of common stock were outstanding; none of the bonds was converted or redeemed.

(A) Compute diluted earnings per share for 2014.

(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.

(C) Assume the same facts as assumed for part (a), except that 25 of the 75 bonds were actually converted on July 1, 2014

Explanation / Answer

The Net Income for 2014 is calculated as below

EBIT= Revenue-Expenses (Other than interest and taxes) = 18300-9150 = 9150

Earnings after tax = 9150-40% of 9150 = $6300

PART A

IF the outstandin common shares are 2250 and there are 75 bonds each convertible to 130 shares i.e. potentially dilutive security of 75 x 130 = 9750

Weighted average diluted shares = (2250*12+9750*12)/12 = 12000

EPS (Diluted) = 6300/12000 = $0.53

PART B

IF bonds were issued on 1 September 2014, they will be outstanding only for 4 months at end of 2014. So weighted average diluted shares are calculated as

Weighted average diluted shares = (2250*12+9750*4)/12 = 5500

EPS (Diluted) = 6300/5500 = $1.15

PART C

If 25 bonds were actually converted then

Weighted average shares = (2250*12+9750*6+3250*6+6500*6)/12 = 12000

EPS (diluted) = 6300/12000 = $0.53

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