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Exercise 16-25 On January 1, 2017, Pronghorn Company issued 10-year, $2,090,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 14 shares of Pronghorn common stock. Pronghorn’s net income in 2017 was $311,000, and its tax rate was 40%. The company had 101,000 shares of common stock outstanding throughout 2017. None of the bonds were converted in 2017. (a) Compute diluted earnings per share for 2017. (Round answer to 2 decimal places, e.g. $2.55.) Diluted earnings per share s (b) Compute diluted earnings per share for 2017, assuming the same facts as above, except that $1,010,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Pronghorn common stock. (Round answer to 2 decimal places, e.g. $2.55.) Diluted earnings per share s
Expert Answer
Note: since two different questions are posted, the first appearing question is answered, as per chegg answering policy.
16.25
a. calculation of diluted earning per share is as below:
| Net income | $311,000 |
| EBT (net income / (1-tax rate) =>($311,000 / (1-0.40)) | $518,333.33 |
| Add: interest on 6% bonds ($2,090,000 * 6%) | $125,400 |
| EBIT (EBT + Interest) | $643,733.33 |
| less: tax @40% | $257,493.33 |
| Adjusted Net income for diluuted EPS | $386,240 |
| potential shares upon conversion (14 shares * 2090 bonds) | 29,260 shares |
| total shares for diluted EPS (existing shares + potential shares) (101,000 + 29,260) | 130,260 |
| Diluted EPS (net income for diluted EPS / potential shares for diluted EPS) ($386,240 / 130,260) | $2.97 |
Diluted earnings per share for 2017 = $2.97….(rounded to two decimals)
b.
Diluted EPS if preferred stock is issued:
| Outstanding shares | 101,000 |
| Add: potential shares on conversion of preferred stock [($1,010,000/$100)*5] | 50,500 |
| Shares outstanding adjusted | 151,500 |
Diluted EPS in this case = Net income / share outstanding adjusted => $311,000 / 151,500 =>$2.05.
exercsie 16-28.
