mouse123

At the beginning of 2004, Osami Corporation had 1.4 million shares of common stock outstanding and no preferred stock. At the end of August 2004, Osami issued 1.2 million new shares of common stock. If Osami reported net income equal to $7.2 million, what were its earnings per share (EPS) for 2004?

A) $4.00.

B) $3.33.

C) $2.77.

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The new shares were only outstanding 4 months of the year. Thus, the weighted average number of shares outstanding is [1.4 + (4/12)(1.2)] million = 1.8 million shares. So basic EPS = $7.2 million / 1.8 million = $4.00.

mouse123

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) 1.9 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.

mouse123

The ZZT Company went public on June 1, 2004, by issuing 25 million shares of common stock. In 2005, the firm raised additional capital by issuing 2 million shares of preferred stock. What is the weighted average number of common shares outstanding for the year ending December 31, 2005?

A) 14,583,333.

B) 25,000,000.

C) 10,416,667.

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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. Since no new common shares were issued in 2005, and there were 25 million shares at the end of 2004, there are 25 million shares at the end of 2005. Note that the preferred stock shares do not affect the common shares outstanding.

mouse123

A simple capital structure is least likely to include:

A) treasury stock.

B) convertible bonds.

C) callable preferred stock.

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Simple capital structures do not include any potentially dilutive securities (a security that could decrease earnings per share if exercised). Convertible bonds are potentially dilutive.

mouse123

Ajax Company has a simple capital structure. Which of the following will NOT be found on its balance sheet?

A) 6%, $50 par value callable bond.

B) 3%, $100 par value convertible bond.

C) 10%, secured mortgage bond denominated in Swiss francs.

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If convertible bonds exist, the firm has a complex capital structure.

mouse123

An analyst has gathered the following information about a company:

• 110,000 shares of common outstanding at the beginning of the year.
• The company repurchases 20,000 of its own common shares on July 1.
• Net income is $300,000 for the year.
• 10,000 shares of existing 10 percent cumulative $100 par preferred outstanding that is not in arrears at the beginning or ending of the year.
• The company also has $1 million in 10 percent callable bonds outstanding.
• The company has declared a $0.50 dividend on the common.

What is the company's basic Earnings Per Share?

A) $2.00.

B) $3.00.

C) $1.00.

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Interest is already deducted from earnings.

mouse123

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.

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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

mouse123

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.

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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.

mouse123

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.

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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.

mouse123

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.

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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