The officers of Environmental, Inc., considered themselves fortunate when the company sold a $9,000,000 subordinated convertible debenture issue on June 30, Year 1, with a 6% coupon. They had the alternative of refunding and enlarging the outstanding term loan, but the interest cost would have been one-half point above the AA bond rate. The AA bond rate was as high as 81⁄2% until March 29, Year 1, when it was lowered to 8%, the rate that prevailed until September 21, Year 1, when it was lowered again to 71⁄2%. As of December 31, Year 1, Environmental, Inc., had the following capital structure:
7% term loan*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,000,000
6% convertible subordinated debentures†. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000,000
Common stock, $1 par, authorized 2,000,000 shares, issued and outstanding. . . 900,000
900,000 warrants, expiring July 1, Year 6‡. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500,000

Additional data for Year 1:
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 500,000
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000
Dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,000
Earnings retained. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900,000
Market prices December 31, Year 1 (averages for Year 1)
Convertible debentures 6%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $107
Common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13
Stock warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.5
Treasury bills interest rate at 12/31/Year 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6%

Required:
a. Calculate and show computations for basic and diluted earnings per share figures for common stock for the Year 1 annual report (assume a 50% tax rate).
b. What is the times-interest-earned ratio for Year 2 assuming net income before interest and taxes is the same as in Year 1 (a 50% income tax rate applies)?