Two Different Companies Have Many Similarities,including the Following

question 69

Essay

Two different companies have many similarities,including the following:
• They both earned net income of $3,500,000 for the year ended December 31,2017;
• They are both 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.
Required:
a.Calculate the basic EPS of both 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 antidilutive.

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Definitions:

Collection

The process of obtaining funds that are due or the grouping of specific items or data, often relevant in financial contexts and research.

Annual Interest Rate

The percentage that represents the cost of borrowing money or the gain from saving money on an annual basis, crucial for financial calculations.

Sales Discount

A reduction in the price of goods or services offered to customers, usually to accelerate sales or reward customer loyalty.

Credit Terms

The conditions under which credit is extended by a lender to a borrower, including repayment schedule, interest rate, and the amount of loan.