E16-20 (EPS with Convertible Bonds, Various Situations) In 2006 Chirac Enterprises issued, at par,
60 $1,000, 8% bonds, each convertible into 100 shares of common stock. Chirac had revenues of $17,500
and expenses other than interest and taxes of $8,400 for 2007. (Assume that the tax rate is 40%.) Throughout
2007, 2,000 shares of common stock were outstanding; none of the bonds was converted or redeemed.
(a) Compute diluted earnings per share for 2007.
(b) Assume the same facts as those assumed for part (a), except that the 60 bonds were issued on
September 1, 2007 (rather than in 2006), 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, 2007.
The solution explains how to calculate the diluted earnings per share
Paid-in vs earned capital & basic vs diluted earnings per share
Why is it important to keep paid-in capital separate from earned capital?
As an investor, is paid-in capital or earned capital more important? Explain why.
As an investor, are basic or diluted earnings per share more important? Explain why.
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