Mirrlees Corp. has 10,000 7% bonds convertible into 30 shares per $1,000 bond. Mirrlees has 1,000,000 outstanding shares. Mirrlees has a tax rate of 40%. The average Aa bond yield at the time of issue was 10%. Compute the "basic earnings per share" if after-tax earnings are $1,400,000.

Question

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Basic earnings per share (EPS) is calculated by dividing the after-tax earnings by the number of outstanding shares. Here, $1,400,000 divided by 1,000,000 shares equals $1.40 per share.