Two Different Companies Have Many Similarities,including the Following

question 34

Essay

Two different companies have many similarities,including the following:
• They all earned net income of $3,500,000 for the year ended December 31,2017;
• They are all subject to a 35% tax rate;
• The average price of the companies' ordinary shares during the year was $26; and
• Each company had 1,400,000 ordinary shares outstanding during the year.
They do have slightly different complex capital structures,however.Specifically:
• Company ACE had stock options outstanding the entire year that allowed employees to buy 50,000 ordinary shares for $20 each until December 31,2019.
• Company DUECE had $600,000 in 5% bonds maturing on December 31,2019 that were outstanding the entire year.Each $1,000 bond is convertible into 5 ordinary shares any time before expiry.
Requirements:
a.Calculate the basic EPS of the four companies.
b.Prepare a schedule that sets out the income effect,share effect,and incremental EPS for each company's security that is convertible into ordinary shares.
c.Consider each company's POS and determine whether it is dilutive or anti-dilutive.For company D assume that the effective rate of interest on the bonds equals the coupon rate and ignore the equity component of the conversion option.

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