The Ottey Corporation issued 10-year, $1,000,000 par, 7% callable convertible subordinated debentures on January 2, 2010. 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 18:1. At the date of issue, the bonds were sold at 98. Bond discount is amortized on a straight-line basis. Ottey's effective tax was 35%. Net income in 2010 was $7,500,000 and the company had $2,000,000 shares outstanding during the entire year.
(a) Prepare a schedule to compute both basic and diluted earnings per share.
(b) Discuss how the schedule would differ if the security was convertible preferred stock.
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The expert examines EPS with convertible bonds and preferred stocks.