You are an accountant for ABC Corporation, currently aprivately-held corporation. To finance a future expansion with thepotential of becoming a publicly-traded corporation, the board ofdirectors is considering the issuance of stock to the existingstockholder group and the issuance of convertible securities to thegeneral public. They know that if they eventually do go public, theinvestment community will use metrics like EPS to assess the priceto pay for the stock. They are quite concerned about how thecompanyâs EPS numbers would compare to those of their competitorsunder this new proposal.
Here are the transactions that are under consideration for2017:
June 1 Issue 6%, $1,000 bonds at a total price of $5 million.Each $1,000 certificate is convertible into 100 shares of commonstock. The par value and market value of the convertible bonds arethe same.
July 15 Issue 300,000 shares of common stock at $3 pershare.
August 1 Issue 20,000 shares of 5% cumulative preferred stock($150 par), with each share convertible into 19 shares of commonstock. The annual 5% dividend payment is paid on December 31 andwill be prorated for the length of time the stock has beenoutstanding. The stock would be issued at par.
October 1 Issue 200,000 shares of common stock for $3 pershare.
December 1 Issue 100,000 shares of common stock for $3 pershare.
No doubt this is an ambitious plan. Although there are a numberof questions regarding the assumptions in the plan, the Board wouldfirst like to know the potential impact on earnings per share.
Note that the company started the year with 440,000 commonshares issued and outstanding.
Instructions
ï¶ explain the differences between basic and diluted earnings pershare.
ï¶ Include in the memo calculations for both basic and dilutedearnings per share given the new capital structure following thisfinancing plan. The forecasted net income (after the bonds and newstock have been issued) for 2017 is $331,500. The tax rate for ABCCorp. is 35%. Be sure these calculations and your final answers areclearly presented.
You are an accountant for ABC Corporation, currently aprivately-held corporation. To finance a future expansion with thepotential of becoming a publicly-traded corporation, the board ofdirectors is considering the issuance of stock to the existingstockholder group and the issuance of convertible securities to thegeneral public. They know that if they eventually do go public, theinvestment community will use metrics like EPS to assess the priceto pay for the stock. They are quite concerned about how thecompanyâs EPS numbers would compare to those of their competitorsunder this new proposal.
Here are the transactions that are under consideration for2017:
June 1 Issue 6%, $1,000 bonds at a total price of $5 million.Each $1,000 certificate is convertible into 100 shares of commonstock. The par value and market value of the convertible bonds arethe same.
July 15 Issue 300,000 shares of common stock at $3 pershare.
August 1 Issue 20,000 shares of 5% cumulative preferred stock($150 par), with each share convertible into 19 shares of commonstock. The annual 5% dividend payment is paid on December 31 andwill be prorated for the length of time the stock has beenoutstanding. The stock would be issued at par.
October 1 Issue 200,000 shares of common stock for $3 pershare.
December 1 Issue 100,000 shares of common stock for $3 pershare.
No doubt this is an ambitious plan. Although there are a numberof questions regarding the assumptions in the plan, the Board wouldfirst like to know the potential impact on earnings per share.
Note that the company started the year with 440,000 commonshares issued and outstanding.
Instructions
ï¶ explain the differences between basic and diluted earnings pershare.
ï¶ Include in the memo calculations for both basic and dilutedearnings per share given the new capital structure following thisfinancing plan. The forecasted net income (after the bonds and newstock have been issued) for 2017 is $331,500. The tax rate for ABCCorp. is 35%. Be sure these calculations and your final answers areclearly presented.
Unlock all answers
