[startupcfo]

Peters Corp.’s capital structure was as follows:

12/31/X1 12/31/X2
Outstanding shares of stock: ———- ———-
Common 110,000 145,000
Convertible preferred 10,000 0
8% convertible bonds 1,000,000 500,000
On May 1, 20X2, the preferred shares were converted into 20,000 shares of common stock. The 8% bonds are convertible into 30,000 shares of common stock. On July 1, $500,000 of the bonds were converted. Net income for 20X2 was $850,000. Assume that the income tax rate is 30%. What is the basic earnings per share for 20X2?

A.
$6.80

Correct B.
$6.50

C.
$6.54

D.
$5.86

the bonds require $80,000 in interest payments per year, of which 30% is tax deductible. That means $56,000 a year net of tax comes out of the net income, right? Shouldn’t that come out of the net income section when calculating EPS?

I’m suggesting that net income should be something higher than 850,000

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[demarcon]

You don't need to calculate the net of tax effect of interest on convertible bonds for basic EPS. It only matters for the if-converted method for diluted EPS. Those were actually converted to C/S on July 1st, so you only need to adjust the denominator by .5 x shares converted into.

[Author]

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