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Canada Corp.A firm has $10 million of outstanding convertible bonds. The coupon on these ...

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Canada Corp.A firm has $10 million of outstanding convertible bonds. The coupon on these ...

Canada Corp.
A firm has $10 million of outstanding convertible bonds. The coupon on these convertibles is $100 per bond, and each bond is convertible into common stock at a conversion price of $25.

The income statement of the firm before conversion is as follows and EBIT remains at $6 million after conversion. Assume the firm paid $2 million in interest on other outstanding debt in addition to the interest paid on the convertible bonds.

	Millions of Dollars before Conversion
EBIT	6.0
Interest @10%	–3.0
Earnings before taxes (EBT)	3.0
Taxes @40%	–1.2
Earnings after taxes (EAT)	1.8

Shares outstanding (millions)	1.0
Earnings per share (EPS)	$1.80

Refer to Scenario: Canada Corp. After conversion, how much is the firm’s after-tax earnings?

▸

$1.71 million

▸

$2.04 million

▸

$2.40 million

▸

$3.17 million

Textbook

Financial Management: Theory and Practice

Edition: 4^th

Authors: Brigham, Ehrhardt, Gessaroli, Nason

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agoldberg2011 Author

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Smart ... Thanks!

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