The Pharoah Corporation issued 10year 4310000 par 7 callable

The Pharoah Corporation issued 10-year, $4,310,000 par, 7% callable convertible subordinated debentures on January 2, 2017. The bonds have a par value of $1,000, with interest payable annually. The current conversion ratio is 13:1, and in 2 years it will increase to 19:1. At the date of issue, the bonds were sold at 98. Bond discount is amortized on a straight-line basis. Pharoah’s effective tax was 35%. Net income in 2017 was $7,900,000, and the company had 2,120,000 shares outstanding during the entire year.

(a) Compute both basic and diluted earnings per share

Solution

Calculation Income for year :-

Net Income for year = $7900000

Add : Adjustment for interest = $201708

Total Income = $8101708

Calculation for Adjustment for interest :-

No. of Debentures = $4310000/1000 = 4310 Debentures

Increase in diluted shares = 4310*19 = $81890

Calculation for EPS :-

Basic EPS = $7900000 / 2120000 shares

= $3.726 or $3.73

DEPS = $8101708 / (2120000+81890)

= $8101708 / 2201890 shares

= $3.679 or $3.68