A Company Has 16 Million Common Shares Outstanding and on Dec

Multiple Choice

A company has 16 million common shares outstanding and on Dec. 31st, declared a year-end net income after tax of $48 million. It pays a fixed dividend of $1.20 on its 4.8 million preferred shares outstanding. The company's has expanded rapidly and traded steadily at a price/earnings ratio of 32. Four years ago, it issued $42 million worth of debt at 4% compounded annually with a convertible feature that could be exercised December 31st of year 4 of the loan at a price of $84.00. If the company issues new shares to the bondholders, what is the dilution in current earnings per share if maximum conversion occurs?

A) No dilution as the current market price of the share is too low for conversion to take place.
B) Earning per share will drop by 8.0 cents per share after full conversion.
C) No dilution as the current market price of the share is too high for conversion to take place.
D) No dilution will occur as the liquidation of the loan through conversion will boost net income after tax.
E) Earnings per share will drop by 9.1 cents per share after full conversion.