Q27. How will dilutive securities affect earnings per share (EPS) when determining diluted earnings per share?

A)   Decrease EPS.

B)   Increase EPS.

C)   Either decrease or increase EPS depending upon if the security is dilutive or antidilutive.

Q28. In calculating the numerator for diluted Earnings Per Share, the interest on convertible debt is:

A)   added to earnings available to common shareholders after an adjustment for taxes.

B)   subtracted from earnings available to common shareholders after an adjustment for taxes.

C)   added to earnings available to common shareholders.

Q29. An analyst has gathered the following information about Artcraft, Inc. for the year:

§           Net income of $30,000.

§           5,000 shares of common stock and 500 shares of 8%, $90 par convertible preferred stock outstanding during the whole year.

§           Each share of convertible preferred can be converted into 4 shares of common stock.

§           Last year, Artcraft issued at par, $60,000 total face value of 6.0% convertible bonds, with each of the 60 bonds convertible into 110 shares of the Artcraft common stock.

If Artcraft's effective tax rate is 40%, what will Artcraft report as diluted earnings per share (EPS)?

A)     $3.12.

B)     $2.36.

C)     $3.37.

Q30. In calculating the numerator for diluted earnings per share, the dividends on convertible preferred stock are:

A)   added to earnings available to common shareholders with an adjustment for taxes.

B)   added to earnings available to common shareholders without an adjustment for taxes.

C)   subtracted from earnings available to common shareholders without an adjustment for taxes.

答案和详解如下：

Q27. How will dilutive securities affect earnings per share (EPS) when determining diluted earnings per share?

A)   Decrease EPS.

B)   Increase EPS.

C)   Either decrease or increase EPS depending upon if the security is dilutive or antidilutive.

Correct answer is A)

Dilutive securities such as convertibles and options are found in a complex capital structure and always decrease EPS. Convertibles and options may also be antidilutive, which will increase EPS hence the name antidilutive. The only way to know if a security is dilutive or antidilutive is to compare the basic EPS to diluted EPS. If the diluted EPS is higher than the basic EPS then the security is antidilutive and should not be included when determining diluted EPS.

Q28. In calculating the numerator for diluted Earnings Per Share, the interest on convertible debt is:

A)   added to earnings available to common shareholders after an adjustment for taxes.

B)   subtracted from earnings available to common shareholders after an adjustment for taxes.

C)   added to earnings available to common shareholders.

Correct answer is A)

Formula = Diluted EPS = [(Net income − Preferred dividends) + Convertible preferred dividends + (Convertible debt interest)(1 − t)] / [(Weighted average shares) + (Shares from conversion of conv. pfd shares) + (Shares from conversion of conv. debt) + (Shares issuable from stock options)]

Q29. An analyst has gathered the following information about Artcraft, Inc. for the year:

§           Net income of $30,000.

§           5,000 shares of common stock and 500 shares of 8%, $90 par convertible preferred stock outstanding during the whole year.

§           Each share of convertible preferred can be converted into 4 shares of common stock.

§           Last year, Artcraft issued at par, $60,000 total face value of 6.0% convertible bonds, with each of the 60 bonds convertible into 110 shares of the Artcraft common stock.

If Artcraft's effective tax rate is 40%, what will Artcraft report as diluted earnings per share (EPS)?

A)     $3.12.

B)     $2.36.

C)     $3.37.

Correct answer is B)

Diluted EPS = adjusted earnings after conversion (EAC) / weighted average plus potential common shares outstanding.

Step 1: Calculate Adjusted EAC

preferred dividends = convertible preferred dividends = (0.08)(90)(500) = 3,600

convertible debt interest = (60,000)(0.06)(1 – 0.40) = 2,160

adjusted EAC = (30,000 – 3,600 + 3,600 + 2,160) = $32,160

Step 2: Calculate Weighted average plus potential common shares outstanding.

Step 3: Calculate Diluted EPS

Diluted EPS = 32,160 / 13,600 = $2.36.

Q30. In calculating the numerator for diluted earnings per share, the dividends on convertible preferred stock are:

A)   added to earnings available to common shareholders with an adjustment for taxes.

B)   added to earnings available to common shareholders without an adjustment for taxes.

C)   subtracted from earnings available to common shareholders without an adjustment for taxes.

Correct answer is B)

Diluted EPS = [(Net income − Preferred dividends) + Convertible preferred dividends + (Convertible debt interest)(1 − t)] / [(Weighted average shares) + (Shares from conversion of conv. pfd shares) + (Shares from conversion of conv. debt) + (Shares issuable from stock options)]

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