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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