Reference no: EM133113046

Question - Sandhill Corporation had net income of $51,200 for the year ended December 31, 2020, and a weighted average number of common shares outstanding of 14,700. The following information is provided regarding the capital structure:

1. 7% convertible debt, 240 bonds each convertible into 41 common shares. The bonds were outstanding for the entire year. The income tax rate is 35%. The bonds were issued at par ($1,000 per bond). No bonds were converted during the year.

2. 4% convertible, cumulative $110 preferred shares, 1,100 shares issued and outstanding. Each preferred share is convertible into 3 common shares. The preferred shares were issued at par and were outstanding the entire year. No shares were converted during the year.

Calculate the income effect of the dividends on preferred shares.

Calculate the basic earnings per share for 2020.

Calculate the after-tax interest paid on the 7% bonds.

Determine an incremental per share effect for 7% bonds.

Determine an incremental per share effect for 4% preferred shares.

Rank the potentially dilutive securities from most dilutive to least dilutive.

Calculate the diluted earnings per share for 2020, using the if-converted method. For simplicity, ignore the requirement to record the debt and equity components of the bonds separately.

When Sandhill Corporation issued the 7% convertible debt, would the company's interest rate on straight debt have been higher or lower than 7%?