This assignment is an exercise in computing diluted EPS. In prior years, Skywalker has had a simple capital structure. That may change in 2012; Skywalker is considering the following actions at the beginning of 2012.

Issue options granting top-level managers the opportunity to purchase a total of 2,000,000 shares of Skywalker common stock for $25 per share.
Exchange $600 million in existing long-term debt (with an interest rate of 8%) for $600 million in 8% convertible bonds (600,000 bonds, each with a $1,000 face value).

Without these changes, Skywalker expects to have net income of $15,890,000 in 2012; the net income forecast reflects the expectation that Skywalker will be subject to a 33% tax rate in 2012. (Note: This $15,890,000 forecasted net income for 2012 comes from the assumptions outlined in Chapter 13; all numbers in Chapter 13 are in millions of dollars.) As of the end of 2011, Skywalker had 10,000,000 common shares outstanding.

Using these data, construct a spreadsheet to answer the following questions.

1. What is Skywalker’s basic EPS expected to be in 2012?
2. What is Skywalker’s diluted EPS expected to be in 2012 if the options and convertible bonds are issued on January 1, 2012, the ending stock price is expected to be $20 per share for 2012, and each bond is convertible into 40 shares of common stock?
3. What is Skywalker’s diluted EPS expected to be in 2012 if the options and convertible bonds are issued on January 1, 2012, the average stock price is expected to be $40 per share during 2012, and each bond is convertible into 35 shares of common stock?
4. Assuming that Skywalker issues the options and convertible bonds on January 1, 2012, complete the following table.

Diluted Earnings per Share in 2012