Ramon Inc. reported net income of $300,000 for the year ended December 31, 2006.

Question

Ramon Inc. reported net income of $300,000 for the year ended December 31, 2006. Ramon Inc. had 50,000 shares of common stock outstanding throughout 2006. On January 1, 2006, Ramon Inc. issued 500, five-year, $1,000 face value bonds at par. The bonds pay 7 percent interest, and each bond can be converted into 30 shares of common stock. Assume Ramon Inc. has a 32 percent income tax rate. None of the bonds were converted in 2006.

Required: Compute the basic EPS and diluted EPS for Ramon Inc. for 2006.

Explanation / Answer

Basic earnings per share:    Net Income / Number of shares    300,000/ 50,000    =   $ 6 per share

Dialuted earnings:

Common stock         50,000
Convertable bond (500*30)     15,000

Weighted avaerage number of shares:   65,000

Increase in earnings (500,000* .07 (1-.32)     =    23,800

Dialute earning per share:   300,000 + 23,800 / 65,000   = $ 4.98 per share

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