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The following information pertains to Bender, Inc., for last year:
  • Net income of $25 million.
  • 1 million shares of $10 par value preferred stock outstanding paying a 10% dividend.
  • 50 million shares of common stock outstanding at the beginning of the year.
  • Issued an additional 5 million shares of common stock on 7/1.

What is Bender, Inc.’s basic earnings per share (EPS)?
A)
$0.457.
B)
$0.476.
C)
$0.384.



50,000,000 common shares × 12 months = 600,000,000
5,000,000 common shares × 6 months = 30,000,000 = 630,000,000
630,000,000 / 12 = 52,500,000 average shares
[$25,000,000(NI) − $1,000,000(preferred dividends)] / 52,500,000 shares = $24,000,000 / 52,5000,000 = $0.457

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The standard equation for computing basic earnings per share (EPS) is:
A)
[Net Income − Common Dividends] / Weighted Average Number of Common Shares Outstanding.
B)
[Net Income – Preferred Dividends] / Weighted Average Number of Common Shares Outstanding.
C)
[Sales − Cost of Goods Sold] / Number of Preferred Shares Outstanding.



The basic EPS calculation does not consider the effects of any dilutive securities in the computation.
Basic EPS = [Net Income – Preferred Dividends]/Weighted Average Number of Common Shares Outstanding.

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Connecticut, Inc.’s stock transactions during the year 20X5 were as follows:
  • January 1: 360,000 common shares outstanding.
  • April 1: 1 for 3 reverse stock split.
  • July 1: 60,000 common shares issued.

When computing for earnings per share (EPS) computation purposes, what is Connecticut’s weighted average number of shares outstanding during 20X5?

A)
210,000.
B)
140,000.
C)
150,000.



Connecticut’s January 1 balance of common shares outstanding is adjusted retroactively for the 1 for 3 reverse stock split, meaning there are (360,000 / 3) = 120,000 “new” shares treated as if they had been outstanding since January 1. The weighted average of the shares issued in July, (60,000 × 6 / 12) = 30,000 is added to that figure, for a total of 150,000.

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The following data pertains to the McGuire 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.

What is the company’s basic earnings per share (EPS)?
A)
$2.50.
B)
$1.00.
C)
$1.20.



Number of average shares:

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
60,000 shares / 12 months = 5,000 average shares

Preferred dividends = ($10)($1,000) = $10,000
Basic EPS = [$15,000(NI) – $10,000(preferred dividends)] / 5,000 shares = $5,000 / 5,000 shares = $1/share

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For a firm with a simple capital structure, all of the following are necessary to measure basic earnings per share (EPS) EXCEPT:
A)
the timing and number of shares issued or repurchased during the year.
B)
dividends paid to preferred shareholders.
C)
dividends paid to common shareholders.



Basic EPS = earnings available to common shareholders divided by the weighted average number of common shares outstanding. Earnings available to common shareholders equals net income minus preferred dividends.

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Washington, Inc.’s stock transactions during the year 20X4 were as follows:

January 1

   720,000 shares issued and outstanding

May 1

   2 for 1 stock split occurred

What was Washington’s weighted average number of shares outstanding during 20X4, for earnings per share (EPS) computation purposes?
A)
1,500,000.
B)
1,440,000.
C)
1,666,667.



The January 1 balance is adjusted retroactively for the stock split and (720,000 × 2 =) 1,440,000 shares are treated as outstanding from January.

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A firm has a weighted average number of 20,000 common shares selling at an average of $10 throughout the year and 11,000, 10%, $100 par value preferred shares. If the firm earns $210,000 after taxes, what is its Basic EPS?
A)
$7.50 / share.
B)
$5.00 / share.
C)
$10.50 / share.



(210,000 − 110,000) / 20,000 = $5 share

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Zichron, Inc., had the following equity accounts on December 31:

  • Common stock: 20,000 shares.

  • Preferred stock A: 10,000 shares convertible into common on a 2 for 1 basis, dividend of $40,000 was declared during the year.

  • Preferred stock B: 10,000 shares, convertible to common on a 4 for 1 basis, dividend of $5,000 was declared during the year.

  • The company reported net income of $120,000 and paid a $20,000 dividend to its common shareholders.
What are the basic earnings per share reported for the year?
A)
$2.75.
B)
$3.75.
C)
$2.00.



($120,000 − 40,000 − 5,000) / 20,000 shares = $3.75.


What are the diluted earnings per share reported for the year?
A)
$3.00.
B)
$1.50.
C)
$1.33.



($120,000) / (20,000 + 20,000 + 40,000) = $1.50.

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An analyst gathered the following information about a company:
  • 01/01/04 - 50,000 shares issued and outstanding at the beginning of the year
  • 04/01/04 - 5% stock dividend
  • 10/01/04 - 10% stock dividend

What is the company’s weighted average number of shares outstanding at the end of 2004?
A)
57,750.
B)
57,500.
C)
55,000.



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. Dividends and splits are applied to all shares issued or repurchased and all original or adjusted shares outstanding prior to the split or dividend.

Step 1) Apply the 04/01/04 dividend to the beginning-of-year shares: Adjusted shares = 1.05 × 50,000 = 52,500

Step 2) Apply the 10/01/04 dividend the adjusted beginning-of-year shares. Adjusted beginning of year shares = 57,750 (= 1.1 × 52,500).

Step 3) Compute the weighted average number of shares. 57,750 × (12/12) = 57,750 shares.

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Last year, the AKB Company had net income equal to $5 million. Combined state and local taxes were 45%. The firm paid $1 million to holders of its 1 million common shares and $250,000 to 100,000 preferred shareholders. What was AKB's earnings per share (EPS) last year?
A)
$2.25.
B)
$4.75.
C)
$2.50.



EPS = earnings available to common shareholders divided by the weighted average number of common shares outstanding. Earnings available to common shareholders is net income minus preferred dividends, or $4,750,000 (= $5 million – 250,000) for AKB.

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