Asked by Leader Onyekwere on Mar 10, 2024
Verified
Refer to Scenario: Canada Corp.How much is the firm's total earnings after conversion?
A) $1.71 million
B) $2.04 million
C) $2.40 million
D) $3.17 million
Convertible Bonds
Bonds that can be converted into a predetermined number of the issuing company's shares at certain times during the bond's life, usually at the discretion of the bondholder.
Earnings Before Taxes
A company's profitability measure calculated by subtracting all expenses, except taxes, from revenues.
Earnings Per Share
A company's profit divided by its number of outstanding shares of common stock.
- Examine the effect of convertible securities on a company's profits and the valuation of its stock.
- Master the calculation and significance of earnings per share (EPS) in scenarios involving convertible securities.
Verified Answer
The new number of shares outstanding is 1,000,000 + 16,000,000 = 17,000,000. Therefore, the new EPS will be:
EPS = EAT / number of shares outstanding
EPS = 1.8 million / 17 million shares = $0.106 per share
The total earnings of the firm after conversion will be:
Total earnings = EPS x number of shares outstanding
Total earnings = $0.106 x 17 million shares = $1.802 million
Therefore, the firm's total earnings after conversion are $1.802 million, which is closest to option C ($2.4 million).
Learning Objectives
- Examine the effect of convertible securities on a company's profits and the valuation of its stock.
- Master the calculation and significance of earnings per share (EPS) in scenarios involving convertible securities.
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