mouse123

Oregon Corp.’s stock transactions during the year were as follows:

• January 1: 320,000 shares outstanding.
• April 1: 1-for-2 reverse stock split occurred.
• July 1: Acquisition of Smith, Inc. in exchange for issuance of 60,000 shares.
• October 1: 30,000 shares issued for cash.

What is Oregon’s weighted average number of shares outstanding?

A) 197,500.

B) 167,500.

C) 250,000.

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The January 1 balance is adjusted retroactively for the reverse stock split and 320,000 / 2 = 160,000 shares are treated as outstanding from January 1. Issuance of stock is included from the date of issuance. The weighted average shares are computed by multiplying the share amounts by the number of months the shares were outstanding, then adding these amounts and dividing the sum by 12.

January 1:	initial shares	160,000 × 12 =	1,920,000
July 1:	Smith acquisition	60,000 × 6 =	360,000
October 1:	cash issuance	30,000 × 3 =	90,000
Total:			2,370,000

Oregon’s weighted average shares = 2,370,000 / 12 = 197,500.

mouse123

Sampson Corp. had 500,000 shares of common stock outstanding at the beginning of the year.  The average market price was $20.

• On April 1, Sampson issued 100,000 shares of $1000 par value 10 percent preferred stock.
• On July 1, Sampson issued 200,000 warrants to purchase 10 shares of common stock  each at $22 per share.
• On October 1, Sampson repurchased 60,000 of common stock as treasury stock for $15 per share.

The weighted average common shares outstanding Sampson should use to compute basic earnings per share (EPS) was:

A) 515,000.

B) 600,000.

C) 485,000.

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Only the October 1 transaction affects the weighted average common shares outstanding because the April 1 transaction would not affect the number of shares outstanding and the July 1 transaction involves warrants which would not be included in the basic EPS calculation. The computation for basic EPS is [(500,000 × 12) − (60,000 × 3)] / 12 = 485,000.

mouse123

Which of the following securities would least likely be found in a simple capital structure?

A) 6%, $5000 par value putable bond.

B) 7%, $100 par value non convertible preferred.

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

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A simple capital structure contains no potentially dilutive securities such as stock options, warrants, or convertible preferred stock.

mouse123

A complex capital structure, for purposes of determining disclosure of diluted Earnings Per Share, is distinguished from a simple capital structure by the:

A) company having issued warrants, convertible securities, or options.

B) company's use of debt to finance its operations.

C) company having preferred stock outstanding.

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A complex structure contains potentially dilutive securities such as options warrants or convertible securities. Where as simple capital structures contain no potentially dilutive securities and contains only common stock and non-convertible securities.

mouse123

Bluff, Inc.’s stock transactions during the year were as follows:

• January 1                      90,000 common shares outstanding.

• April 1                           20% stock dividend is declared and issued.

• October 1                     10,000 shares are reacquired as treasury stock.

What is Bluff’s weighted average number of shares outstanding during the year?

A) 105,500.

B) 98,000.

C) 101,000.

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Initial shares: 90,000 × 1.20 =	108,000
– Reacquired treasury shares: 10,000 × 3/12 =	–2,500
	105,500

mouse123

Jersey, Inc.’s financial information included the following for its year ended December 31:

• 160,000 shares of common stock were outstanding for the entire year.
• 18,000 shares of 10%, $100 par value cumulative preferred stock were outstanding for the entire year.
• Common stock dividends paid during the current year were $240,000.
• All preferred stock dividends were paid for the current year.
• Net income was $720,000.

Basic earnings per share for Jersey, Inc. for the year ended December 31 are closest to:

A) $3.38.

B) $4.50.

C) $2.81.

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Jersey, Inc.’s basic EPS = (net income – preferred dividends) / (weighted average number of common shares outstanding) was ($720,000 - $180,000)/160,000 = $3.38.

mouse123

Juniper Corp’s stock transactions during the year 20X4 were as follows:

• January 1            540,000 shares issued and outstanding
• March 1              50 percent stock dividend
• July 1                 180,000 treasury shares reacquired
• October 1            60,000 treasury shares reissued

When computing for earnings per share (EPS) computation purposes, what was Juniper’s weighted average number of shares outstanding during 20X4?

A) 930,000.

B) 735,000.

C) 870,000.

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The January 1 balance is adjusted retroactively for the stock dividend and (540,000 × 1.5) = 810,000 shares are treated as outstanding from January 1. The weighted average number of shares is computed by multiplying the shares by the number of months held, as follows:

January 1	Initial shares	(810,000 × 12) =	9,720,000
July 1	Reacquired shares	(-180,000 × 6) =	1,080,000
October 1	Reissued shares	(60,000 × 3) =	180,000
			8,820,000

Weighted average shares was (8,820,000 / 12) = 735,000 shares.

mouse123

Which type of a capital structure contains no dilutive securities?

A) Simple.

B) Basic.

C) Complex.

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A complex capital structure contains potentially dilutive securities such as options, warrants, or convertible securities. There is no basic capital structure but there are basic earnings per share which does NOT consider the effects of any dilutive securities in the computation of EPS.

mouse123

A firm with a capital structure consisting of only common stock and non-convertible bonds is said to have a:

A) simple capital structure.

B) non-diluted capital structure.

C) straight capital structure.

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A simple capital structure is one that contains no securities that have the potential to dilute a firm’s earnings per share. For example, convertible bonds, convertible preferred stock, options, and warrants have the potential to dilute earnings per share upon conversion or exercise.

mouse123

A complex capital structure would typically contain:

A) convertible bonds.

B) variable rate notes.

C) bank notes.

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A complex capital structure is one that contains securities that have the potential to dilute a firm’s earnings per share. For example, convertible bonds, convertible preferred stock, options, and warrants have the potential to dilute earnings per share upon conversion or exercise.