During 2004, Covax Corp. reported net income of $2.4 million and 2 million shares of common stock. Covax paid cash dividends of $14,000 to its preferred shareholders and $30,000 to its common shareholders. In 2004, Covax issued 900, $1,000 par, 5.5 percent bonds for $900,000. Each bond is convertible to 50 shares of common stock. Assume the tax rate is 40%. Compute Covax’s basic and diluted EPS. Basic EPS Diluted EPS A) $1.19 $1.22 B) $1.22 $1.22 C) $1.19 $1.18
Answer is C 2,400,000 - 14,000 --------------------------- = 1.1930 2,000,000 2,400,000 - 14,000 + 29,700 -------------------------------------- = 1.1813 2,000,000 + 45,000
Where is the 29700 coming from?
29,700= $900,000 x 5.5%(bond coupon payment) x 0.6 (1-the effective tax rate)
the $$$ they save in not having to pay interest on bond that were converted
gforce, dbfinley, given also that EPS decreases, can say the bonds are dilutive, thus use them in diluted EPS. if however, when the bonds were added and EPS increased, they’re anti-dilutive, thus one would go back to basic (unless options/warrants/prefferred are also there)