As part of CM ‘ s plan to obtain financing for its expansion at the end of 2016, you have already prepared an analysis of the effects on the

As part of C&M’s plan to obtain financing for its expansion at the end of 2016, you have already prepared an analysis of the effects on the financial statements of (1) issuing more common stock to the existing stockholder group; (2) issuing bonds; (3) going public with a large stock issue; and (4) borrowing money from a financial institution.

Conner and Martin now have another possible alternative that would basically permit them to keep control of the company, at least in the short run. To finance expansion, they are considering the issuance of stock to the existing stockholder group and the issuance of convertible securities to the general public. They know that if they eventually do go public, the investment community will use metrics like EPS to assess the price to pay for the stock. They are quite concerned about how the company’s EPS numbers would compare to those of their competitors under this new proposal.

Here are the transactions that are under consideration for 2016:

June 1          Issue 6%, $1,000 bonds at a total price of $5 million. Each $1,000 certificate is convertible into 100 shares of common stock. The par value and market value of the convertible bonds are the same.

July 15          Issue 300,000 shares of common stock at $3 per share.

August 1       Issue 20,000 shares of 5% cumulative preferred stock ($150 par), with each share convertible into 19 shares of common stock. Dividends are paid on the preferred stock on June 30 and December 31 of each year. The stock would be issued at par.

October 1     Issue 200,000 shares of common stock for $3 per share.

December 1  Issue 100,000 shares of common stock for $3 per share.

No doubt this is an ambitious plan. Although there are a number of questions about the assumptions in the plan, Conner and Martin would first like to know the potential impact on earnings per share.


Write a memo to Conner and Martin in which you explain basic and diluted earnings per share. Compute earnings per share given the new capital structure following this financing plan. The forecasted net income for 2016 is $331,500, and the tax rate for C&M is 35%.  Note – The net income forecast includes the interest expense on the bonds that are to be issued June 1.

To: Management, Connor and Martin From: Michael Date: 1/3/2016 Subject: Basic and Diluted Earnings per Share I have gone through your new financing plan and I would like to elaborate on the effect…

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