honeycfa

Assume that the exercise price of an option is $10, and the average market price of the stock is $13. Assuming 999 options are outstanding during the entire year, what is the number of shares to be added to the denominator of the diluted earnings per share (EPS)?

A) 768.

B) 999.

C) 231.

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(999)(10) = 9,990
9,990 / 13 = 768
999 ? 768 = 231

honeycfa

Assume that the exercise price of an option is $11, and the average market price of the stock is $16. Assuming 1,039 options are outstanding during the entire year, what is the number of shares to be added to the denominator of the Diluted EPS?

A) 325.

B) 714.

C) 1,039.

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(1,039 options)($11) = $11,429
$11,429 / $16 per share
1039 ? 714 = 325 shares or [(16 ? 11) / 16]1,039 = 325.

honeycfa

When considering the impact of warrants on earnings per share, the method to calculate the number of shares added to the denominator is derived using which method?

A) Treasury Stock method.

B) Cost recovery method.

C) Weighted average method.

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The treasury stock method assumes the hypothetical funds received by the company from the exercise of the options are used to purchase shares of the company's common stock in the market at the average market price.

honeycfa

When considering convertible preferred stock which of the following components of the earnings per share (EPS) equation needs to be adjusted to calculate diluted earnings per share?

A) The numerator and denominator.

B) The numerator.

C) The denominator.

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The numerator will increase because earnings available to the common shareholder are increased by the reduction in preferred dividends. The denominator increases because the weighted average number of shares increases upon conversion of the preferred stock.

honeycfa

Stanley Corp. had 100,000 shares of common stock outstanding throughout 2004. It also had 20,000 stock options with an exercise price of $20 and another 20,000 options with an exercise price of $28. The average market price for the company's stock was $25 throughout the year. The stock closed at $30 on December 31, 2004. What are the number of shares used to calculate diluted earnings per share for the year?

A) 105,000.

B) 104,000.

C) 120,000.

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Only the stock options with an exercise price of $20 are dilutive. The additional shares of 4,000 (20,000 ? [(20,000 × 20) / 25]) are added to the 100,000 common shares outstanding.

honeycfa

BWT, Inc. shows the following data in its financial statements at the end of the year.

Assume all securites were outstanding at the beginning of the year:

• 6.125% convertible bonds, convertible into 33 shares of common stock. Issue price $1,000, 100 bonds outstanding.
• 6.25% convertible preferred stock, $100 par, 2,315 shares outstanding. Convertible into 3.3 shares of common stock, Issue price $100.
• 8% convertible preferred stock, $100 par, 2,572 shares outstanding. Convertible into 5 common shares, Issue price $80.
• 9,986 warrants are outstanding with an exercise price of $38. Each warrant is convertible into 1 share of common. Average market price of common is $52.00 per share.
• Common shares outstanding at the beginning of the year were 40,045.
• Net Income for the period was $200,000, while the tax rate was 40%.

What were the preferred dividends paid this whole year?

A) $35,045.

B) $14,469.

C) $20,576.

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(0.0625)(100)(2,315) = 14,469

(0.08)(100)(2,572) = 20,576

14,469 + 20,576 = 35,045

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What was the after-tax interest charge?

A) $6,215.

B) $2,450.

C) $3,675.

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(0.06125)(1,000)(100)

(6,125)(1 ? 0.4) = 3,675

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How many new shares had to be issued to facilitate warrant conversion?

A) 2,689.

B) 13,665.

C) 9,986.

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9,986 × $38 = $379,468

$379,468 / $52 = 7,297 common shares

9,986 ? 7,297 = 2,689 new common shares

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What were the basic and diluted EPS for the year?

Basic EPS

Diluted EPS

A) $3.97 $3.06

B) $4.12 $2.95

C) $4.12 $3.06

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Basic EPS = Net income ? preferred dividends / Wt Average shares of common = ($200,000 ? $35,045) / 40,045 = 164,955/40,405 = $4.12

Diluted EPS:

(100 bonds)(33 common shares/bond) = 3,300 common shares

(2,315 preferred shares)(3.3) = 7,640

(2,572 preferred shares)(5) = 12,860

7,640 + 12,860 = 20,500 common shares from preferred

[($200,000 ? $35,045) + $35,045 + $3,675] / (40,045 + 3,300 + 20,500 + 2,689)

= $203,675 / 66,534 shares = $3.06