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    P16-7 (Computation of Basic and Diluted EPS) The information on page 826 pertains to Prancer Company for 2004.

    Net income for the year $1,200,000
    8% convertible bonds issued at par ($1,000 per bond). Each bond is convertible into 40 shares of common stock. 2,000,000
    6% convertible, cumulative preferred stock, $100 par value. Each share is convertible into 3 shares of common stock. 3,000,000
    Common stock, $10 par value 6,000,000
    Common stock options (granted in a prior year) to purchase 50,000 shares of common stock at $20 per share 500,000
    Tax rate for 2004 40%
    Average market price of common stock $25 per share
    There were no changes during 2004 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock.


    (a) Compute basic earnings per share for 2004.

    (b) Compute diluted earnings per share for 2004.

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    This solution is comprised of a detailed explanation to compute basic earnings per share for 2004.