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–M Inc. issued 2,000 convertible bonds in 2009 at a coupon rate of 8% and a...

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Finance

–M Inc. issued 2,000 convertible bonds in 2009 at a coupon rateof 8% and a par value of £1,000. Each bond is convertible into MInc.’s common stock at £25 per share.

M Inc. expected the stock price torise rapidly after the convertible was issued and lead to a quickconversion of the bond debt into equity. However, a recessionaryclimate has prevented that from happening, and the bonds are stilloutstanding. In 2010 M Inc. had net income of £3 million. Onemillion share of its stock were outstanding for the entire year,and its marginal tax rate is 40%.

Calculate M Inc.’s basic and dilutedEPS. (Diluted EPS assumes all convertible bonds are converted atthe beginning of the year)

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3.6 Ratings (321 Votes)
i Earnings per share EPS Net income Outstanding shares EPS 3 million 1 million shares EPS 3 per share ii Diluted EPS Net income available to equity shareholders Outstanding shares    See Answer
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–M Inc. issued 2,000 convertible bonds in 2009 at a coupon rateof 8% and a par value of £1,000. Each bond is convertible into MInc.’s common stock at £25 per share.M Inc. expected the stock price torise rapidly after the convertible was issued and lead to a quickconversion of the bond debt into equity. However, a recessionaryclimate has prevented that from happening, and the bonds are stilloutstanding. In 2010 M Inc. had net income of £3 million. Onemillion share of its stock were outstanding for the entire year,and its marginal tax rate is 40%.Calculate M Inc.’s basic and dilutedEPS. (Diluted EPS assumes all convertible bonds are converted atthe beginning of the year)

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