andytrader

At the beginning of 2004, the Alaska Corporation had 2 million shares of common stock outstanding and no preferred stock. At the end of August, 2004, Alaska issued 600,000 new shares of common stock. If Alaska reported net income equal to $8.8 million, what was the firm’s earnings per share for 2004?

A) $3.38.

B) $4.00.

C) $3.67.

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EPS = earnings available to common shareholders divided by the weighted average number of common shares outstanding. With no preferred shareholders, all of net income is available to the common shareholders. The weighted average number of shares outstanding equals the original 2 million shares plus 4/12 of the additional 600,000 shares. The 4/12 weight is used because the new shares were only outstanding 4 months of the year. Thus, EPS = $8.8 million / [2 million + (4/12)(600,000)] = 8.8/2.2 = $4.00.

andytrader

Maine Company’s stock transactions during the year are described below:

• 
  January 1                               100,000 common shares outstanding
• 
  March 1                                  2 for 1 stock split
• 
  August 1                                10% stock dividend

The weighted average number of shares outstanding used to calculate earnings per share is:

A) 220,000.

B) 211,111.

C) 201,666.

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The January 1 balance of common shares outstanding is adjusted retroactively for both stock dividends and stock splits. The weighted average shares outstanding for the year = 100,000 × 2 × 1.1 = 220,000.

andytrader

Suppose that JPK, Inc., paid dividends of $80,000 to its preferred shareholders and $40,000 to its common shareholders during 2004. The company had 20,000 shares of common stock issued and outstanding on January 1, 2004, issued 7,000 more shares on June 1, 2004, and paid a 10% stock dividend on August 1, 2004. Assuming that JPK had $150,000 in net income, what is the firm’s basic earnings per share (EPS) for 2004?

A) $2.64.

B) $2.71.

C) $2.91.

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1/1/00 22,000 shares (adjusted for 10% stock dividend) × 12 months = 264,000
6/1/00 7,700 shares (adjusted for 10% stock dividend) × 7 months = 53,900
Total share month = 317,900
Average shares = 317,900 / 12 = 26,492Basic EPS = ($150,000 − $80,000) / 26,492 = 2.64

andytrader

The following data pertains to the Megatron company:

• Net income equals $15,000.
• 5,000 shares of common stock issued on January 1.
• 10% stock dividend issued on June 1.
• 1000 shares of common stock were repurchased on July 1.
• 1000 shares of 10%, par $100 preferred stock each convertible into 8 shares of common were outstanding the whole year.

How many common shares should be used in computing the company’s basic earnings per share (EPS)?

A) 5,000.

B) 4,500.

C) 5,500.

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1/1 5,500 shares issued (includes 10% stock dividend on 6/1) × 12 = 66,000
7/1 1,000 shares repurchased × 6 months = 6,000
66,000 − 6,000 = 60,000 shares
60,000 shares / 12 months = 5,000 average shares

andytrader

A company has the following sequence of events regarding their stock:

• One million shares outstanding at the beginning of the year.
• On June 30th, they declared and issued a 10% stock dividend.
• On September 30th, they sold 400,000 shares of common stock at par.

Basic earnings per share at year-end will be computed on how many shares?

A) 1,200,000.

B) 1,000,000.

C) 1,100,000.

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andytrader

Moulding Company’s net income was $13,820,000 with 2,600,000 shares outstanding. The average share price for the year was $58.00. Moulding had 10,000 options to purchase 10 shares each at $40 per share outstanding the entire year. Moulding Company’s diluted earnings per share are closest to:

A) $3.71.

B) $5.25.

C) $5.32.

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Moulding’s basic EPS (net income / weighted average common shares outstanding) was $13,820,000 / 2,600,000 = $5.32.
Using the treasury stock method to compute diluted EPS, if the options were exercised, cash inflow would be 10,000 × 10 × $40 = $4,000,000. Based on the average share price of $58.00, the number of Moulding shares that can be purchased with the cash flow is $4,000,000 / $58 = 68,966. The number of shares that would have been created is 100,000 – 68,966 = 31,034. Diluted EPS was $13,820,000 / (2,600,000 + 31,034) = $5.25.

andytrader

Valuable Corp.’s basic earnings per share (EPS) and diluted EPS for the year are different. Given this information, which of the following statements is least accurate?

A) All of Valuable's potentially dilutive securities are antidilutive.

B) Diluted EPS is less than basic EPS.

C) Valuable Corp.'s capital structure may include both options and warrants.

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If all of Valuable’s potentially dilutive securities were antidilutive, then EPS would equal diluted EPS.

andytrader

An analyst compiled the following information from Hampshire, Inc.’s financial activities in the most recent year:

• Net income was $2,800,000.
• 100,000 shares of common stock were outstanding on January 1.
• The average market price per share for the year was $250.
• 10,000 shares of 6%, $1,000 par value preferred shares were outstanding the entire year.
• 10,000 warrants, which allow the holder to purchase 10 shares of common stock for each warrant held at a price of $150 per common share, were outstanding the entire year.
• 30,000 shares of common stock were issued on September 1.

Hampshire, Inc.’s diluted earnings per share are closest to:

A) $14.67.

B) $18.38.

C) $20.00.

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To compute Hampshire’s basic EPS ((net income – preferred dividends) / weighted average common shares outstanding), the weighted average common shares must be computed. 100,000 shares were outstanding from January 1, and 30,000 shares were issued on September 1, so the weighted average is 100,000 + (30,000 × 4 / 12) = 110,000. Basic EPS is ($2,800,000 – (10,000 × $1,000 × 0.06)) / 110,000 = $20.00.
If the warrants were exercised, cash inflow would be 10,000 × $150 × 10 = $15,000,000 for 10 × 10,000 = 100,000 shares. Using the treasury stock method, the number of Hampshire shares that can be purchased with the cash inflow (cash inflow / average share price) is $15,000,000 / $250 = 60,000. The number of shares that would be created is 100,000 – 60,000 = 40,000. Diluted EPS is $2,200,000 / (110,000 + 40,000) = $14.67.

andytrader

Selected information from Feder Corp.’s financial activities for the year is as follows:

• 
  Net income was $7,650,000.
• 
  1,100,000 shares of common stock were outstanding on January 1.
• 
  The average market price per share was $62.
• 
  Dividends were paid during the year.
• 
  The tax rate was 40%.
• 
  10,000 shares of 6% $1,000 par value preferred shares convertible into common shares at a rate of 20 common shares for each preferred share were outstanding for the entire year.
• 
  70,000 options, which allow the holder to purchase 10 shares of common stock at an exercise price of $50 per common share, were outstanding the entire year.

Feder Corp.’s diluted earnings per share (EPS) was closest to:

A) $5.87.

B) $4.91.

C) $5.32.

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Feder’s basic earnings per share ((net income – preferred dividends) / weighted average shares outstanding) was (($7,650,000 – ($1,000 × 10,000 × 0.06)) / 1,100,000 =) $6.41.
If the convertible preferred stock was converted to common stock at January 1, (10,000 × 20 =) 200,000 additional common shares would have been issued, dividends on the preferred stock would not have been paid, and Diluted EPS would have been ($7,650,000 / (1,100,000 + 200,000) = $5.88. Because $5.88 is less than basic EPS of $6.41, the preferred shares are dilutive.
Using the treasury stock method, if the options were exercised cash inflow would be (70,000 × 10 × $50 =) $35,000,000. The number of Feder shares that can be purchased with the inflow (cash inflow divided by the average share price) is ($35,000,000 / $62 =) 564,516.
The number of shares that would have been created is (700,000 – 564,516 =) 135,484. Diluted EPS was ($7,650,000 / (1,100,000 + 135,484) =) $6.19. Because this is less than the EPS of $6.41, the options are dilutive.
Combining the calculations, Diluted EPS was (($7,650,000) / (1,100,000 + 200,000 + 135,484) = $5.32.

andytrader

In applying the treasury stock method, if warrants allow the purchase of 1 million shares at $42 per share when the average price is $56 per share, how many shares will be added to the firm’s weighted average number of shares outstanding?

A) 1,000,000.

B) 250,000.

C) 420,000.

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The treasury stock method would allow the 1 million additional shares to be partially offset by the number of shares that could be repurchased with the amount of money received for those shares. In this case, the 1 million shares issued would be offset by (1,000,000 × $42 / $56) or 750,000 shares.