The Simon Corporation issued 10-year, $5,780,000 par, 7% callable convertible su
ID: 2497649 • Letter: T
Question
The Simon Corporation issued 10-year, $5,780,000 par, 7% callable convertible subordinated debentures on January 2, 2014. The bonds have a par value of $1,000, with interest payable annually. The current conversion ratio is 15:1, and in 2 years it will increase to 20:1. At the date of issue, the bonds were sold at 97. Bond discount is amortized on a straightline basis. Simon's effective tax was 37%. Net income in 2014 was $7,635,000, and the company had 2,455,000 shares outstanding during the entire year. Compute both basic and diluted earnings per share. (Round answers to 2 decimal places, e.g. $2.55.)Explanation / Answer
Basic earnings per share:
Net Income: 7,635,000
Number of shares outstanding : 2,455,000
Basic EPS : 7,635,000/2,455,000 = 3.11
Dialuted earnings per share:
Net income : 7,635,000
Interest on callable bonds (57,80,000* 7 %) 404,600
Tax saving on interest 404,600 *.35 = 141,610
After tax increse in interest income (404,600 -141,610) 262,990
Tax saving on amortisation (17,340 *.37) (6,416)
Net income including after tax bond interest 7,891,574
Number of shares outstanding: 2,455,000
Convertable bond (5,780,000/1000*15 ) 86,700
Total number of shares 2,541,700
Dialuted EPS (7,891,574/2,541,700) 3.10
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