# Question & Answer: Exercise 16-25 On January 1, 2017, Pronghorn Company issued 10-year, \$2,090,000 face value, 6% bonds, at par. E…..

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

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Question & Answer: Exercise 16-25 On January 1, 2017, Pronghorn Company issued 10-year, \$2,090,000 face value, 6% bonds, at par. E…..
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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.