Q35. Kendall Company’s Net Income for 2004 was $830,000 with 200,000 shares outstanding. In 2003, Kendall issued 1,000 six

percent $1,000 convertible (into 20 common shares each) bonds that were outstanding since 2003. Kendall’s tax rate was 40

percent.

What was Kendall Company’s diluted earnings per share (Diluted EPS) for 2004?

A)   $3.77.

B)   $3.93.

C)   $4.15.

Q36. Selected information from Caledonia, Inc.’s financial activities in the year 2006 was as follows:

§           Net Income was $460,000.

§           2,300,000 shares of common stock were outstanding on January 1.

§           The average market price per share was $2 and the year-end stock price was $1.50.

§           1000 shares of 8 percent, $1000 par value preferred shares were outstanding on January 1.

§           Dividends were paid in 2006.

10,000 warrants, each of which allows the holder to purchase 100 shares of common stock at an exercise price of $1.50 per common share, were outstanding the entire year. Caledonia’s Diluted earnings per share (Diluted EPS) for 2006 was closest to:

A)   $0.149.

B)   $0.165.

C)   $0.133.

Q37. Young Distributors, Inc. issued convertible bonds two years ago, and those bonds are the only potentially dilutive security

     Young has issued. In 2005, Young’s basic earnings per share (EPS) and diluted EPS were identical, but in 2004 they were

     different. Which of the following factors could NOT explain the difference between EPS and Diluted EPS? The:

A)   average market price of Young increased in 2005.

B)   bonds were redeemed by Young Distributors at the beginning of 2005.

C)   bonds were antidilutive in 2005 but not in 2004.

Q38. Nichols Company’s net income for 2006 was $978,000 with 1,250,000 shares outstanding. The average share price in 2006

was $8.50. Nichols issued 2,000 warrants to purchase 100 shares each for $10 per share in 2005. Nichols Company’s diluted

earnings per share (diluted EPS) for 2006 is closest to:

A)   $0.777.

B)   $0.768.

C)   $0.782.

Q39. Selected information from Indigo Corp.’s financial activities in the year 4 included the following:

§           Net income was $5,600,000.

§           The tax rate was 40%.

§           500,000 shares of common stock were outstanding on January 1.

§           The average market price per share was $82 in year 4.

§           Dividends were paid in year 4.

§           6,000, 5 percent $1,000 par value convertible bonds, which are convertible at a ratio of 20 shares for each bond, were outstanding since January year 3.

§           200,000 shares of common stock were issued on July 1.

§           100,000 shares of common stock were purchased by the company as treasury stock on October 1.

Indigo Corp.’s diluted earnings per share (Diluted EPS) for year 4 was closest to:

A)   $9.74.

B)   $8.49.

C)   $8.32.

答案和详解如下：

Q35. Kendall Company’s Net Income for 2004 was $830,000 with 200,000 shares outstanding. In 2003, Kendall issued 1,000 six

percent $1,000 convertible (into 20 common shares each) bonds that were outstanding since 2003. Kendall’s tax rate was 40

percent.

What was Kendall Company’s diluted earnings per share (Diluted EPS) for 2004?

A)   $3.77.

B)   $3.93.

C)   $4.15.

Correct answer is B)

Kendall’s basic EPS was ($830,000 / 200,000 =) $4.15. To compute Diluted EPS, bond interest paid net of taxes is added back to net income in the numerator of the EPS equation, and the number of shares that would be issued in the conversion is added to the denominator. Kendall’s Diluted EPS was (($830,000 + (1,000 * $1,000 * 0.06) * (1– 0.4)) / (200,000 + (20,000)) = $3.93). Note that since diluted EPS is less than basic EPS, we know that the bonds are dilutive and should be considered in calculating diluted EPS.

Q36. Selected information from Caledonia, Inc.’s financial activities in the year 2006 was as follows:

§           Net Income was $460,000.

§           2,300,000 shares of common stock were outstanding on January 1.

§           The average market price per share was $2 and the year-end stock price was $1.50.

§           1000 shares of 8 percent, $1000 par value preferred shares were outstanding on January 1.

§           Dividends were paid in 2006.

10,000 warrants, each of which allows the holder to purchase 100 shares of common stock at an exercise price of $1.50 per common share, were outstanding the entire year. Caledonia’s Diluted earnings per share (Diluted EPS) for 2006 was closest to:

A)   $0.149.

B)   $0.165.

C)   $0.133.

Correct answer is A)

Caledonia’s basic earnings per share (EPS) ((net income − preferred stock dividends) / weighted average common shares outstanding) was ((($460,000 − ($1,000 × 1,000 × 0.08)) / 2,300,000 =) $0.165. Using the treasury stock method, if the warrants were exercised, cash inflow would be (10,000 × 100 × $1.50 =) $1,500,000. The number of Caledonia shares that could be purchased with the inflow, using the average share price, was ($1,500,000 / $2 =) 750,000. The net increase in common shares outstanding would have been (1,000,000 − 750,000 =) 250,000. Diluted EPS was ($380,000 / (2,300,000 + 250,000 =) $0.149.

Q37. Young Distributors, Inc. issued convertible bonds two years ago, and those bonds are the only potentially dilutive security

     Young has issued. In 2005, Young’s basic earnings per share (EPS) and diluted EPS were identical, but in 2004 they were

     different. Which of the following factors could NOT explain the difference between EPS and Diluted EPS? The:

A)   average market price of Young increased in 2005.

B)   bonds were redeemed by Young Distributors at the beginning of 2005.

C)   bonds were antidilutive in 2005 but not in 2004.

Correct answer is A)

Average market price is not a factor in the calculations for including convertible bonds in basic or diluted EPS. Both remaining factors listed could be potential explanations for the difference in basic and diluted EPS.

Q38. Nichols Company’s net income for 2006 was $978,000 with 1,250,000 shares outstanding. The average share price in 2006

was $8.50. Nichols issued 2,000 warrants to purchase 100 shares each for $10 per share in 2005. Nichols Company’s diluted

earnings per share (diluted EPS) for 2006 is closest to:

A)   $0.777.

B)   $0.768.

C)   $0.782.

Correct answer is C)

Nichols basic EPS (net income / weighted average common shares outstanding) was:

$978,000 / 1,250,000 = $0.782.

Because the exercise price of the warrants is higher than the average share price, the warrants are antidilutive and are excluded from diluted EPS. Because there were no other potentially dilutive securities, Nichols reported only basic EPS in 2006.

Q39. Selected information from Indigo Corp.’s financial activities in the year 4 included the following:

§           Net income was $5,600,000.

§           The tax rate was 40%.

§           500,000 shares of common stock were outstanding on January 1.

§           The average market price per share was $82 in year 4.

§           Dividends were paid in year 4.

§           6,000, 5 percent $1,000 par value convertible bonds, which are convertible at a ratio of 20 shares for each bond, were outstanding since January year 3.

§           200,000 shares of common stock were issued on July 1.

§           100,000 shares of common stock were purchased by the company as treasury stock on October 1.

Indigo Corp.’s diluted earnings per share (Diluted EPS) for year 4 was closest to:

A)   $9.74.

B)   $8.49.

C)   $8.32.

Correct answer is C)

To compute Indigo’s basic earnings per share (EPS) ((net income – preferred dividends) / weighted average common shares outstanding), the weighted average common shares must be computed. ((500,000 × 12) + (200,000 × 6) – (100,000 × 3) / 12 =) 575,000. EPS was ($5,600,000 / 575,000 =) $9.74.

For Diluted EPS, assume the bonds were converted on January 1, and that interest payments were not made on the bonds. Increasing net income by the amount of bond interest net of tax effect is ($5,600,000 + ((6,000 × $1,000 × 0.05) (1 − 0.40)) =) $5,780,000. Diluted EPS was ($5,780,000 / (575,000 + 120,000) =) $8.32.

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