(This question has been answered incorrectly twice on Chegg.) Riggs Corporation
ID: 2791605 • Letter: #
Question
(This question has been answered incorrectly twice on Chegg.)
Riggs Corporation has the following balance sheet information at December 31, 2016.
The convertible bonds were issued at par in 2014 and are convertible into Riggs’s common stock at a ratio of 15 shares of stock to 1 bond. In its December 31, 2016 annual report, Riggs reported 125,000 exercisable qualified stock options. Each option allows the holder to acquire one share of common stock for $19 per share. All of the options were outstanding at the end of 2017. On October 1, 2017, Riggs purchased 32,000 shares of treasury stock for $50 per share. The average market price of the common stock during 2017 was $50 per share, and the December 31, 2017, price was $56. Riggs’s net income for the year ended December 31, 2017, was $825,000, and its tax rate was 35%.
Required:
Compute Riggs’s basic EPS for the year ended December 31, 2017.
Compute Riggs’s diluted EPS for the year ended December 31, 2017. There are no antidilutive securities.
Current liabilities $ 800,000 Convertible bonds ($1,000 par, 5%) 2,000,000 Common stock ($1 par, 300,000 shares issued 300,000 Additional paid-in capital 2,100,000 Retained earnings 3,230,000 Treasury stock (43,000 shares) (1,161,000 ) Total liabilities and shareholders’ equity $ 7,269,000Explanation / Answer
Soln : Basic EPS is defined as net income/outstanding shares = 825000/300000 = 2.75
As in case of basic shares, it is not considering any other stocks comes under convertibility or option stocks.
After tax rate income is considered and net income is after tax income.
Now Diluted EPS to be calculated, which consider the convertible shares if executed.
So, convertible bond shares = 2000*15 = 30000, Interest expense = 5% of 2000000 = 0.05*2000000 = $100000
Interest expmes saved after tax = 100000*(1-tax rate) = 65000
Net income = 825000+65000 = 890000
Options convertible stock = 125000*19 = 2375000 and no. of shares to be raised using the amount of exercise = 2375000/56 = 42411, So, total no. of shares created using the option = 125000-42411 = 82589
Diluted EPS = 890000/(300000+30000+82589) = 2.16
Please let me know if answer is correct.
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