clearlycanadian

Assume that the exercise price of an option is $6, and the average market price of the stock is $10. Assuming 802 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) 481.

B) 321.

C) 802.

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(802)(6) = 4,812
4,812 / 10 = 481.2
802 − 481 = 321 or [(10 − 6) / 10] × 802 = 321

clearlycanadian

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

clearlycanadian

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.

clearlycanadian

The following data pertains to the Sapphire Company:

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

What is the company’s diluted earnings per share (EPS)?

A) $2.50.

B) $1.00.

C) $1.15.

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Number of average common 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
= 60,000
60,000 shares / 12 months = 5,000 average shares
Preferred dividends = ($10)(1,000) = $10,000
Number of shares from the conversion of the preferred shares = (1,000 preferred shares)(8 shares of common/share of preferred) = 8,000 common
Diluted EPS = [$15,000(NI) − $10,000(pfd) + $10,000(pfd)] / 5000(common shares) + 8000(shares from the conv. pfd. shares) = $15,000 / 13,000 shares = $1.15/share
This number needs to be compared to basic EPS to see if the preferred shares are antidilutive.
Basic EPS = [$15,000(NI) − $10,000(preferred dividends)] / 5,000 shares = $5,000 / 5,000 shares = $1/share
Since the EPS after the conversion of the preferred shares is greater than before the conversion the preferred shares are antidilutive and they should not be treated as common in computing diluted EPS. Therefore diluted EPS is the same as basic EPS or $1/share.

clearlycanadian

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) Cost recovery method.

B) Weighted average method.

C) Treasury Stock 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.

clearlycanadian

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.

B) The denominator.

C) The numerator and 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.

clearlycanadian

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) 110,000.

C) 104,000.

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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.

clearlycanadian

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) $14,469.

B) $20,576.

C) $35,045.

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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) $3,675.

B) $6,215.

C) $2,450.

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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) 13,665.

B) 2,689.

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 $3.06

C) $4.12 $2.95

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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 = $4.12Diluted 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

clearlycanadian

Is an acquisition of treasury stock or a loss from the write-down of inventory under the lower-of-cost-or-market rule included in comprehensive income?

Inventory write-down

Acquisition of treasury stock

A) No Yes

B) Yes No

C) No No

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Comprehensive income includes all transactions that affect shareholders’ equity except transactions with shareholders. Thus, any transaction that affects net income would also affect comprehensive income. Since the inventory write-down is included in net income, it is part of comprehensive income. The acquisition of treasury stock is a transaction with shareholders; thus, it is not a part of comprehensive income.

clearlycanadian

For the year ended December 31, 2007, Cobra Company reported the following financial information:

Revenue	$100,000
Cost of goods sold	40,000
Operating expenses	20,000
Unrealized gain from foreign currency translation	5,000
Unrealized loss on cash flow hedging derivatives	3,000
Dividends paid to common shareholders	7,500
Realized gain on sale of equipment	1,000

Ignoring taxes, calculate Cobra’s net income and comprehensive income for 2007.

Net income

Comprehensive income

A) $40,000 $43,000

B) $41,000 $43,000

C) $41,000 $2,000

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Net income is equal to $41,000 ($100,000 revenue – $40,000 COGS – $20,000 operating expenses + $1,000 realized gain on sale of equipment). Comprehensive income includes all transactions that affect stockholders’ equity except transactions with shareholders. Comprehensive income includes net income, unrealized gains and losses from available-for-sales securities, unrealized gains and losses from cash flow hedging derivatives, and gains and losses from foreign currency translation. Thus, comprehensive income is equal to $43,000 ($41,000 net income + $5,000 unrealized gain from foreign currency translation – $3,000 unrealized loss from cash flow hedging derivatives). Dividends paid is a transaction with shareholders and is not included in comprehensive income.