Exercise 16-24 Incorrect answer. Your answer is incorrect. Try again. The Martinez Corporation issued 10-year, $4,000,000...

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Exercise 16-24 Incorrect answer. Your answer is incorrect. Tryagain. The Martinez Corporation issued 10-year, $4,000,000 par, 7%callable convertible subordinated debentures on January 2, 2017.The bonds have a par value of $1,000, with interest payableannually. The current conversion ratio is 13:1, and in 2 years itwill increase to 17:1. At the date of issue, the bonds were sold at98. Bond discount is amortized on a straight-line basis. Martinez’seffective tax was 35%. Net income in 2017 was $10,950,000, and thecompany had 1,980,000 shares outstanding during the entire year.(a) Compute both basic and diluted earnings per share. (Roundanswers to 2 decimal places, e.g. $2.55.) Basic earnings per share$Entry field with incorrect answer 3.14 Diluted earnings per share$Entry field with incorrect answer 2.91 Click if you would like toShow Work for this question:

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3.6 Ratings (278 Votes)

(a) Net income for year $10,950,000

Add: Adjustment for interest (net of tax) 187,200*

$11,137,200

*Maturity value $4,000,000

Stated rate X 7%

Cash interest 280,000

Discount amortization [(1.00 – .98) X $4,000,000 X 1/10] 8,000

Interest expense 288,000

1 – tax rate (35%) X .65

After-tax interest $ 187,200

$4,000,000/$1,000 = 4,000 debentures

Increase in diluted earnings per share denominator:

4,000

X 17

68,000

Earnings per share:

Basic EPS $10,950,000 ÷ 1,980,000 = $5.53

Diluted EPS $11,137,200 ÷ 2,048,000 = $5.44

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