1. (EPS with Convertible Bonds and Preferred Stock) The Ottey Corporation issued 10-year, $4,000,000 par, 7% callable convertible subordinated debentures on January 2, 2010. The bonds have a par value of $1,000, with interest payable annually. The current conversion ratio is 14 : 1, and in 2 years it will increase to 18 : 1. At the date of issue, the bonds were sold at 98. Bond discount is amortized on a straight line basis. Ottey's effective tax was 35%. Net income in 2010 was $7,500,000, and the company had 2,000,000 shares outstanding during the entire year.
(a) Prepare a schedule to compute both basic and diluted earnings per share.
(b) Discuss how the schedule would differ if the security was convertible preferred stock.