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Chapter 5: Q19-20BP (page 627)

Online Network Inc. has net income of \(650,000 in the current fiscal year. There are 100,000 shares of common stock outstanding along with convertible bonds, which have a total face value of \)1.6 million. The \(1.6 million is represented by 1,600 different \)1,000 bonds. Each $1,000 bond pays 6 percent interest. The conversion ratio is 10. The firm is in a 30 percent tax bracket.

a. Compute basic earnings per share.

b. Compute diluted earnings per share.

Short Answer

Expert verified

a) Earnings per share is $6.50

b) Diluted earning per share is $6.18

Step by step solution

01

Meaning of Earnings Per Share

A metric or financial calculation is done by a business entity for the determination of the profitability of each share is known as earnings per share. It is used for analysis by equity investors.

02

Calculation of earnings per share

Earnings鈥�per鈥�share=EarningsShares=$650,000100,000=$6.50

03

Calculation of diluted earnings per share

Diluted鈥�earning鈥�per鈥嬧赌�share=Adjusted鈥�earnings鈥�after鈥�taxesShares鈥�outstanding+All鈥�convertables鈥�securities=$650,000+$67,200100,000+16,000=$717,200116,000=$6.18

Working notes:

Calculation of the amount of $67,200

Amount=Interest鈥�saving脳(1-Tax鈥�rate)=$96,000脳(1-0.30)=$96,000脳0.70=$67,200



04

Calculation of amount of $16,000

Additional鈥�sahre鈥�from鈥�conversation=Convertible鈥�bond脳Conversion鈥�ratio=1,600脳10=16,000

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Most popular questions from this chapter

Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

d. Determine what rate of return must be earned on the net proceeds to the corporation so there will not be a dilution in earnings per share during the year of going public.

Question: The Bailey Corporation, a manufacturer of medical supplies and equipment, is planning to sell its shares to the general public for the first time. The firm鈥檚 investment banker, Robert Merrill and Company, is working with Bailey Corporation in determining a number of items. Information on the Bailey Corporation follows:

Bailey corporation

Income statement

For the year 20X1

Sales (all on credit)

\(42,680,000

Cost of goods sold

\)32,240,000

Gross profit

\(10,440,000

Selling and administrative expenses

\)4,558,000

Operating profit

\(5,882,000

Interest expense

\)600,000

Net income before taxes

\(5,282,000

Taxes

\)2,120,000

Net income

\(3,162,000

Bailey corporation

Balance sheet

As of December 31, 20X1

Assets

Current assets:

Cash

\)250,000

Marketable securities

\(130,000

Accounts receivables

\)6,000,000

Inventory

\(8,300,000

Total current assets

\)14,680,000

Net plant and equipment

\(13,970,000

Total assets

\)28,650,000

Liabilities and stockholders鈥� equity

Current liabilities:

Accounts payable

\(3,800,000

Notes payable

\)3,550,000

Total current liabilities

\(7,350,000

Long-term liabilities

\)5,620,000

Total liabilities

\(12,970,000

Stockholder鈥檚 equity:

Common stock (1,800,000 shares at \)1 par)

\(1,800,000

Capital in excess of par

\)6,300,000

Retained earnings

\(7,580,000

Total stockholder鈥檚 equity

\)15,680,000

Total liabilities and stockholder鈥檚 equity

\(28,650,000

b. Assuming an underwriting spread of 5 percent and out-of-pocket costs of \)300,000, what will net proceeds to the corporation be?

Trump Card Co. will issue stock at a retail (public) price of \(32. The company will receive \)29.20 per share.

a. What is the spread on the issue in the percentage terms?

b. If the firm demands receiving a new price only $2.20 below the public price suggested in part a, what will the spread be in percentage terms?

c. To hold the spread down to 2.5 percent based on the public price in part a, what net amount should Trump Card Co. receive?

Explain how the zero-coupon rate bond provides return to the investor. What are the advantages to the corporation? (LO16-2)

The Hamilton Corporation Company has 4 million shares of stock outstanding and will report earnings of \(6,910,000 in the current year. The company is considering the issuance of 1 million additional shares that can only be issued at \)30 per share.

a. Assume that Hamilton Corporation Company can earn 7.0 percent on the proceeds. Calculate the earnings per share.

b. Should the new issue be undertaken based on earnings per share?
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