1215

The SSP Company had 5 million shares outstanding on January 1. On February 15 the board of directors approved a 3:2 stock split, effective April 1. What is the weighted average number of shares outstanding for the SSP Company for year-end?

A) 7,500,000 shares.

B) 6,875,000 shares.

C) 5,625,000 shares.

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Stock splits and stock dividends are applied to all shares that existed at the beginning of the period and shares that were issued or repurchased during the period, but prior to the split or dividend. For SSP, the 5 million beginning-of-year shares outstanding are adjusted to 7.5 million shares (5.0 × 3/2) as a result of the 3:2 split.

1215

Zimmer Co. had the following common shares outstanding:

• January 1, 2003: 50,000
• October 1, 2003: Issued 20,000 shares
• March 1, 2004: Issued a 10% stock dividend
• July 1, 2004: Declared a 2 for 1 stock split
• October 1, 2004: Repurchased 30,000 shares

Calculate the weighted average number of common shares outstanding for 2003 and 2004.

2003

2004

A) 55,000 124,500

B) 10,000 124,000

C) 55,000 146,500

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For year 2003:
50,000 × 12 = 600,000
20,000 × 3 = 60,000
660,000/12 = 55,000

For year 2004:
70,000 × 1.1 × 2 = 154,000 × 12 = 1,848,000
(30,000) × 3 = (90,000)
1,758,000 / 12 = 146,500

1215

Robinson Company had 1 million shares outstanding at the beginning of the year. On April 1, Robinson issued an additional 300,000 shares. On July 1, Robinson issued 200,000 more shares. What is Robinson's weighted average number of shares outstanding for the calculation of earnings per share?

A) 1,325,000 shares.

B) 1,500,000 shares.

C) 1,200,000 shares.

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Weighted average shares = 1,000,000 + (0.75) 300,000 + (0.5) 200,000 = 1,325,000 shares

1215

The following information pertains the QRK Company:

• One million shares of common stock outstanding at the beginning of 2005.
• 200,000 shares issued on the last day of March.
• 500,000 shares issued on the last day of June.
• 800,000 shares issued on the last day of September.

What is the number of shares that should be used to compute 2005 earnings per share for the QRK Company?

A) 2.5 million.

B) 1.5 million.

C) 1.6 million.

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The weighted average number of common shares outstanding is the number of shares outstanding during the year weighted by the portion of the year they were outstanding. For the QRK Company, the weighted number of shares outstanding is the original one million shares plus 150,000 shares for the end-of-March issue (= 200,000 × 9/12), plus 250,000 shares for the end-of-June issue (= 500,000 × 6/12), plus 200,000 shares for the end-of-September issue (= 800,000 × 3/12), or 1.6 million shares.

1215

The ZZT Company went public on June 1, 2004, by issuing 25 million shares of common stock. In 2005, the firm raised additional capital by issuing 2 million shares of preferred stock. What is the weighted average number of common shares outstanding for the year ending December 31, 2005?

A) 25,000,000.

B) 14,583,333.

C) 10,416,667.

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The weighted average number of common shares outstanding is the number of shares outstanding during the year weighted by the portion of the year they were outstanding. Since no new common shares were issued in 2005, and there were 25 million shares at the end of 2004, there are 25 million shares at the end of 2005. Note that the preferred stock shares do not affect the common shares outstanding.

1215

A simple capital structure is least likely to include:

A) convertible bonds.

B) treasury stock.

C) callable preferred stock.

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Simple capital structures do not include any potentially dilutive securities (a security that could decrease earnings per share if exercised). Convertible bonds are potentially dilutive.

1215

Ajax Company has a simple capital structure. Which of the following will NOT be found on its balance sheet?

A) 6%, $50 par value callable bond.

B) 10%, secured mortgage bond denominated in Swiss francs.

C) 3%, $100 par value convertible bond.

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If convertible bonds exist, the firm has a complex capital structure.

1215

An analyst has gathered the following information about a company:

• 110,000 shares of common outstanding at the beginning of the year.
• The company repurchases 20,000 of its own common shares on July 1.
• Net income is $300,000 for the year.
• 10,000 shares of existing 10 percent cumulative $100 par preferred outstanding that is not in arrears at the beginning or ending of the year.
• The company also has $1 million in 10 percent callable bonds outstanding.
• The company has declared a $0.50 dividend on the common.

What is the company's basic Earnings Per Share?

A) $3.00.

B) $2.00.

C) $1.00.

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Interest is already deducted from earnings.

1215

The standard equation for computing basic earnings per share (EPS) is:

A) [Net Income – Preferred Dividends] / Weighted Average Number of Common Shares Outstanding.

B) [Net Income ? Common Dividends] / Weighted Average Number of Common Shares Outstanding.

C) [Sales ? Cost of Goods Sold] / Number of Preferred Shares Outstanding.

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The basic EPS calculation does not consider the effects of any dilutive securities in the computation.

Basic EPS = [Net Income – Preferred Dividends]/Weighted Average Number of Common Shares Outstanding.

1215

Connecticut, Inc.’s stock transactions during the year 20X5 were as follows:

• January 1: 360,000 common shares outstanding.
• April 1: 1 for 3 reverse stock split.
• July 1: 60,000 common shares issued.

When computing for earnings per share (EPS) computation purposes, what is Connecticut’s weighted average number of shares outstanding during 20X5?

A) 150,000.

B) 210,000.

C) 270,000.

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Connecticut’s January 1 balance of common shares outstanding is adjusted retroactively for the 1 for 3 reverse stock split, meaning there are (360,000 / 3) = 120,000 “new” shares treated as if they had been outstanding since January 1. The weighted average of the shares issued in July, (60,000 × 6 / 12) = 30,000 is added to that figure, for a total of 150,000.