(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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