Q5. Hamilton correctly calculates diluted EPS at approximately:

A)   $1.19.

B)   $1.23.

C)   $1.50.

Q6. Empire Watch Company’s basic earnings per share (EPS) and diluted earnings per share (Diluted EPS) were both $2.00 in

2004, in 2005 basic EPS was $2.50 but Diluted EPS was $2.25. The fact that basic EPS and diluted EPS were the same in

2004 and different in 2005 could possibly be explained by any of the following EXCEPT:

A)   the average price per share of Empire Watch's common stock was higher in 2005.

B)   Empire Watch issued convertible bonds in 2005.

C)   Empire Watch purchased its own stock and held it as treasury stock in 2005.

Q7. All of the following are considered a potentially dilutive securities EXCEPT:

A)     stock options.

B)     preferred stock.

C)     warrants.

Q8. Examples of potentially dilutive securities include all of the following EXCEPT:

A)     non-convertible bonds.

B)     convertible preferred stock.

C)     options.

答案和详解如下：

Q5. Hamilton correctly calculates diluted EPS at approximately:

A)   $1.19.

B)   $1.23.

C)   $1.50.

Correct answer is A)

As we will show below, only the options and convertible preferred stock are dilutive.

First, calculate basic EPS to use as a benchmark to determine dilutive capital components.
Basic EPS = (net income – preferred dividends) / weighted average common shares outstanding
Here, preferred dividends = (0.5 shares × $30 par × 0.10 dividend) = $1.5 million = (9.0 – 1.5) / 5.0 = $1.50.

Now, check for dilutive elements.

§  options are dilutive because the exercise price is less than the stock price. There is no numerator impact from the options. The denominator impact = # options – [(# options × exercise price) / average stock price)] = 400,000 – [(400,000 × 32) / 35] = 34,286 or 0.034 million.

§  To check whether the convertible preferred stock is dilutive we need to determine whether it decreases EPS. To the numerator, we add back the preferred dividend. The denominator impact = (# preferred shares × conversion rate) = 500,000 × 5 = 2,500,000, or 2.5 million. Then, EPS = (9.0 – 1.5 + 1.5) / (5.0 + 2.5) = $1.20. Thus the convertible preferred stock is dilutive.

§  To check whether the convertible bonds are dilutive we need to determine whether they decrease EPS. To the numerator, we add back the after-tax impact of the coupon, or (face value × coupon × (1 − t)), or (10,000 bonds × 1,000 par × 0.06 coupon × 0.6 ) = 360,000, or $0.360 million. The denominator impact = (# convertible bonds × conversion rate) = 10,000 × 8 = 80,000, or 0.080 million. Then, EPS = (9.0 – 1.5 + 0.360) / (5.0 + 0.080) = $1.55. Thus the bonds are antidilutive.

Finally, calculate dilutive EPS:
Diluted EPS = (9.0 – 1.5 + 1.5) / (5.0 + 2.5 + 0.034) = approximately $1.19

Q6. Empire Watch Company’s basic earnings per share (EPS) and diluted earnings per share (Diluted EPS) were both $2.00 in

2004, in 2005 basic EPS was $2.50 but Diluted EPS was $2.25. The fact that basic EPS and diluted EPS were the same in

2004 and different in 2005 could possibly be explained by any of the following EXCEPT:

A)   the average price per share of Empire Watch's common stock was higher in 2005.

B)   Empire Watch issued convertible bonds in 2005.

C)   Empire Watch purchased its own stock and held it as treasury stock in 2005.

Correct answer is C)

The reacquisition of treasury stock affects the denominator of both the EPS and Diluted EPS equations, but does not cause identical numbers to become different. The other factors will introduce potential earning dilution and therefore could cause diluted EPS to be less than basic EPS.

Q7. All of the following are considered a potentially dilutive securities EXCEPT:

A)     stock options.

B)     preferred stock.

C)     warrants.

Correct answer is B)

Not all preferred stock is dilutive. Only convertible preferred stock is potentially dilutive.

Q8. Examples of potentially dilutive securities include all of the following EXCEPT:

A)     non-convertible bonds.

B)     convertible preferred stock.

C)     options.

Correct answer is A)

Preferred stock and bonds are only considered to be potentially dilutive if they are convertible. Options are always considered to be potentially dilutive.

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