Reference no: EM132842974

Problem - EPS with Convertible Bonds and Preferred Shares - Hayward Corporation had net income of $50,000 for the year ended December 31, 2020, and weighted average number of common shares outstanding of 10,000. The following information is provided regarding the capital structure:

1. 7% convertible debt, 200 bonds each convertible into 40 common shares. The bonds were outstanding for the entire year. The income tax rate is 25%. The bonds were issued at par [$1,000 per bond]. No bonds were converted during the year.

2. 4% convertible, cumulative $100 preferred shares, 1,000 shares issued and outstanding. Each preferred share is convertible into two common shares. The preferred shares were issued at par and were outstanding the entire year. No shares were converted during the year.

Required -

a. Calculate the basic earnings per share for 2020. Round to the nearest cent.

b. Briefly explain the if-converted method.

c. 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. Round to the nearest cent. Use the three-step process in arriving at your answers. Describe each step as you proceed to the final answer.

d. When Hayward Corporation issued the 7% convertible debt, would the company's interest rate on straight debt have been higher or lower than 7%? Explain your answer.