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    EPS with Convertible Bonds, Various Situations

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    22. (EPS with Convertible Bonds, Various Situations) In 2003 Bonaparte Enterprises
    issued, at par, 60 $1,000, 8% bonds, each convertible into 100 shares of common stock. Bonaparte had revenues of $17,500 and expenses other than interest and taxes of $8,400 for 2004. (Assume that the tax rate is 40%.) Throughout 2004, 2,000 shares of common stock were outstanding; none of the bonds was converted or redeemed.

    Instructions
    a. Compute diluted earnings per share for 2004.
    b. Assume the same facts as those assumed for part (a), except that the 60 bonds
    were issued on September 1, 2004 (rather than in 2003), and none have been
    converted or redeemed.
    c. Assume the same facts as assumed for part (a), except that 20 of the 60 bonds
    were actually converted on July 1, 2004.

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    Solution Preview

    (a) Diluted earnings per share for 2004
    Revenues $17,500
    Expenses:
    Other than interest $8,400
    Bond interest (60 X $1,000 X .08) 4,800 13,200
    Income before income taxes 4,300
    Income taxes (40%) 1,720
    Net income $ 2,580
    Diluted earnings per share are assuming all conversion of bonds into shares. The number of shares outstanding is 2,000. There are 60 bonds covertible into 100 shares each or a total of 6,000 shares. The total diluted number of shares are 2,000+6,000=8,000. The Net Income is 2,580. If the bonds are converted, there ...

    Solution Summary

    The solution explains the calculation of diluted EPS given convertible bonds

    $2.19

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