Intermediate Accounting
3rd Edition
ISBN: 9780136912644
Author: Elizabeth A. Gordon; Jana S. Raedy; Alexander J. Sannella
Publisher: Pearson Education (US)
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Textbook Question
Chapter 20, Problem 20.13BE
Computing Diluted EPS, Convertible Debt. Axelon Enterprises has asked you to determine whether its proposed issue of convertible debt will have dilutive effects on earnings per share. If the convertible bonds prove to be dilutive, the company might consider an alternate vehicle to finance the $10,000,000 construction cost of a new plant facility Currently. Axelon’s basic earnings per share is equal to $14 per share after factoring in the after-tax interest expense on the proposed bond issue. The convertible debt will be issued on April 1 at $10,000,000 par value, pays interest at a rate of 6%, and is convertible to 200,000 common shares. Axelon’s tax rate is 25%. Will the convertible debt be dilutive? Provide a brief explanation and all computations needed to support your conclusion.
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Students have asked these similar questions
An all equity firm announces that it is going to borrow $11 million in debt and then keep that debt at a constant value relative to the overall value of the company. What would be the appropriate discount rate for the expected interest tax shields generated by this additional debt?
A. Required return on debt
B. Required return on equity
C. Required return on Assets
D. WACC
Suppose that LilyMac Photography expects EBIT to be approximately $94,000 per year
for the foreseeable future, and that it has 400 10-year, 4 percent annual coupon bonds
outstanding. (Use Table 11.1)
What would the appropriate tax rate be for use in the calculation of the debt component
of LilyMac's WACC?
Tax rate
Mc.
Type here to search
7730
Your firm is considering issuing one-year debt and has come up with the following
estimates of the value of the interest tax shield and the probability of distress for
different levels of debt:
PV (interest tax shield, in $ million)
0
$80 million
$90 million
$50 million
$2 million
0.01
0.00%
10
0.70
0.00%
Debt Level (in $ million)
30
50
0.90
1.00%
1.15
2.00%
70
1.30
7.00%
90
1.50
16.00%
110
1.70
Probability of Financial Distress
Suppose the firm has a beta of zero, so that the appropriate discount rate for
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optimal if, in the event of distress, the firm will have distress costs equal to $2
million?
31.00%
Chapter 20 Solutions
Intermediate Accounting
Ch. 20 - Prob. 20.1QCh. 20 - Prob. 20.2QCh. 20 - If-Converted Method. Does the if-converted...Ch. 20 - Diluted EPS. If all potentially dilutive...Ch. 20 - Diluted EPS. Can diluted earnings per share on...Ch. 20 - Diluted EPS, Convertible Debt, and Preferred...Ch. 20 - Prob. 20.7QCh. 20 - Prob. 20.8QCh. 20 - Prob. 20.9QCh. 20 - EPS Disclosures. is an entity required to present...
Ch. 20 - Prob. 20.11QCh. 20 - Hutchins Company had 200,000 shares of common...Ch. 20 - Prob. 20.2MCCh. 20 - Prob. 20.3MCCh. 20 - Prob. 20.4MCCh. 20 - Refer to the information about Hutchins Company in...Ch. 20 - Prob. 20.6MCCh. 20 - Prob. 20.1BECh. 20 - Prob. 20.2BECh. 20 - Computing Income for Basic EPS. Russo Watches, Ltd...Ch. 20 - Prob. 20.4BECh. 20 - Compute Weighted-Average Number of Shares...Ch. 20 - Compute Weighted-Average Number of Shares...Ch. 20 - Prob. 20.7BECh. 20 - Prob. 20.8BECh. 20 - Prob. 20.9BECh. 20 - Prob. 20.10BECh. 20 - Prob. 20.11BECh. 20 - Computing Basic and Diluted EPS, Options. Nicks...Ch. 20 - Computing Diluted EPS, Convertible Debt. Axelon...Ch. 20 - Computing Basic and Diluted EPS, Preferred Stock....Ch. 20 - Computing Weighted-Average Number of Common Shares...Ch. 20 - Prob. 20.3ECh. 20 - Computing Basic and Diluted EPS, Convertible...Ch. 20 - Prob. 20.5ECh. 20 - Computing Basic and Diluted EPS, Convertible Bonds...Ch. 20 - Computing Basic and Diluted EPS, Convertible Bonds...Ch. 20 - Computing Basic and Diluted EPS, Convertible...Ch. 20 - Computing Basic and Diluted EPS, Options,...Ch. 20 - Computing Basic and Diluted EPS, Convertible...Ch. 20 - Computing Basic and Diluted EPS, Convertible...Ch. 20 - Prob. 20.12ECh. 20 - Prob. 20.1PCh. 20 - Prob. 20.2PCh. 20 - Computing Basic and Diluted EPS. Convertible...Ch. 20 - Prob. 20.4PCh. 20 - Computing Basic and Diluted EPS, Convertible...Ch. 20 - Computing Basic and Diluted EPS, Convertible...Ch. 20 - Prob. 20.7PCh. 20 - Prob. 20.8PCh. 20 - Prob. 1JCCh. 20 - Prob. 1FSCCh. 20 - Prob. 1SSCCh. 20 - Basis for Conclusions Case 1: Antidilutive...Ch. 20 - Basis for Conclusions Case 2: Treasury Stock...
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