Kadri Corporation (a fictional company) reported basic EPS of $3.00 and diluted EPS of $2.40 for 20X1. Its EPS calculations follow:

Kadri issued the convertible preferred stock at the beginning of 20X1 and the Series A and Series B convertible debt at par in late 20X0. No stock options were granted or exercised in 20X1.

Required:

1. The convertible preferred stock has a $100 par value per share. How many preferred shares were issued, and what was the common stock conversion rate for each preferred share?

2. The Series B convertible debt pays interest at 10% annually, and Kadri’s marginal income tax rate is 21%. How much Series B debt was outstanding, and what is the common stock conversion rate for each $1,000 face Series B bond?

3. What are the interest rate and common stock conversion rate for the $5 million par of Series A debt?

4. During the year, 50,000 shares were under option, and the average exercise price was $20 per share. What was the average market price of the company’s common stock during 20X1?

5. Explain why Series A debt carries a lower interest rate than Series B debt although both were issued at par on the same day in 20X0.

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EPS Calculation for 20X1 Numerator Denominator Net income $3,500,000 Less dividend on 10% convertible preferred stock Weighted-average common shares outstanding Basic EPS = $3.00 Stock option dilution Series A convertible debt dilution (500,000) 1,000,000 $3,000,000 1,000,000 33,334 316,000 395,000 500,000 250,000 Series B convertible debt dilution 200,000 200,000 10% convertible preferred stock dilution Diluted EPS = $2.50 $4,211,000 1,683,334