The Simon Corporation issued 10-year, $5,000,000 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 14:1, and in 2 years it will increase to 18:1. At the date of issue, the bonds were sold at 98. Bond discount is amortized on a straight-line basis. Simon’s effective tax was 35%. Net income in 2017 was $9,500,000, and the company had 2,000,000 shares outstanding during the entire year. (a) Compute both basic and diluted earnings per share. (Round answers to 2 decimal places, e. g. $2.55.)

The basic earning per share are $4.75

The diluted earnings per share are $4.66

Explanation:

In order to calculate the basic earning per share we have to make the following calcuation:

basic earnings per share = $9,500,000 / $2,000,000 = $4.75

The basic earning per share are $4.75

In order to calculate the diluted earnings per share we have to calculate first the following:

maturity value = $5,000,000 * 7% = $350,000 interest

discount amortization [ ( 1 -.0.98) * $5,000,000 *1/10] = $10,000

interest expense = $350,000 + $10,000 = $360,000

1 -tax rate 35% = $360,000 *65% = $234,000

$ 234,000 + $9,500,000 = $9,734,000

debentures = $5,000,000 / $1,000 = $5,000

$5,000 * 18 = $90,000

Therefore, diluted earning pershare = $9,734,000 / ( $2,000,000 + $90,000) =$4.66

The diluted earnings per share are $4.66

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