Question

In 2013, Chirac Enterprises issued, at par, 75 $1,060, 8% bonds, each convertible into 200 shares of common stock. Chirac had revenues of $19,100 and expenses other than interest and taxes of $8,860 for 2014. (Assume that the tax rate is 40%.) Throughout 2014, 2,530 shares of common stock were outstanding; none of the bonds was converted or redeemed.(a) Compute diluted earnings per share for 2014. (Round answer to 2 decimal places, e.g. $2.55.)(b) Assume the same facts as those assumed for part (a), except that the 75 bonds were issued on September 1, 2014 (rather than in 2013), and none have been converted or redeemed. (Round answer to 2 decimal places, e.g. $2.55.)(c) Assume the same facts as assumed for part (a), except that 25 of the 75 bonds were actually converted on July 1, 2014. (Round answer to 2 decimal places, e.g. $2.55.)

Answer 1

Chirac Enterprises

a) Diluted EPS = $0. 35

b) Diluted EPS = $0. 35

c) Diluted EPS = $0. 35

Step-by-step explanation:

a) Data and Calculations:

Issued at par 75 $1,060, 8% bonds = $70,000 Bonds Premium $9,500

Each of the 75 bonds are convertible into 200 shares = 15,000 (75 * 200) shares

2014 Revenue $19,100

2014 expenses 8,860

Pre-tax income $10,240

Tax (40%) 4,096

Net income $6,144

Ordinary EPS = $2.43 per share ($6,144/2,530)

Common shares = 2,530

Convertible bonds shares = 15,000

Total shares = 17,530

Diluted EPS = $0. 35 ($6,144/17,530) per share

b) The basic assumption for computing diluted earnings per share is that Chirac's earnings are expressed per share (EPS) as if all convertible securities were exercised. This implies that whether the bonds had been converted or not, the number of the shares used for calculating diluted earnings per share will remain the same in these scenarios.