Question

Ignatius Corporation had 7 million shares of common stock outstanding during the current calendar year. It issued ten thousand $1,000, convertible bonds on January 1. Each bond is convertible into 50 shares of common stock. The bonds were issued at face amount and pay interest semiannually at an annual rate of 10%. On June 30, Ignatius issued 100,000 shares of $100 par 6% cumulative preferred stock. Dividends are declared and paid quarterly. Ignatius has an effective tax rate of 25%. Ignatius would report the following EPS data (rounded) on its net income of $20 million: Basic EPS Diluted EPS a. $ 2.77 $ 2.67 b. $ 2.81 $ 2.73 c. $ 2.85 $ 2.67 d. $ 2.81 $ 2.68

Answer 1

Ignatius Corporation

Basic and Diluted EPS are:

c. $ 2.85 $ 2.67

Step-by-step explanation:

Data and Calculations:

Common stock outstanding = 7 million shares

Issued 10,000, $1,000 convertible bonds = $10,000,000

Convertible bonds = 10,000 bonds = 500,000 shares (10,000 x 50)

Interest payment = semiannual at 10% per annum

6%, 100,000 Cumulative preferred stock at $100 par = $10,000,000

Preferred dividend = $600,000

Net Income of $20 million

Basic EPS = $20,000,000/7,000,000 = $2.857 per share

Diluted EPS = $20,000,000/7,500,000 = $2.67 per share

To obtain the diluted EPS, the outstanding common stock is increased by the number of potential convertible bonds.