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

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

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.

1215

A complex capital structure would typically contain:

A) variable rate notes.

B) convertible bonds.

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.

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

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.

1215

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.

1215

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

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

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

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

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

1215

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's use of debt to finance its operations.

B) company having preferred stock outstanding.

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

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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.