The Blossom Corporation issued 10-year, $4,390,000 par, 8% callable convertible

Question

The Blossom Corporation issued 10-year, $4,390,000 par, 8% 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 14:1, and in 2 years it will increase to 19:1. At the date of issue, the bonds were sold at 99. Bond discount is amortized on a straight-line basis. Blossom’s effective tax was 40%. Net income in 2017 was $9,500,000, and the company had 1,970,000 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

Answer: Net Income $             9,500,000.00 Add: Interest expense (After-tax) $                213,354.00 Adjusted net Income $             9,713,354.00 where, Interest expense after-tax Interest on convertible bonds $                351,200.00 Add: Discount Amortization $                     4,390.00 (1.00-0.99)*$4390,000*(1/10) Interest Expense $                355,590.00 Less: Tax @ 40% $                142,236.00 After-tax Interest expense $                213,354.00 No. of dilutive shares No. of shares outstanding                 1,970,000.00 Add: Convertible bonds                       83,410.00 ($4,390,000/$1,000*19) Total                 2,053,410.00 Earning per share Basic EPS Net Income/No. of shares outstanding 9,500,000 /1,970,000 $       4.82 Dilutive EPS Adjusted net Income/No. of dilutive shares $9,713,354/2,053,410) $       4.73

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