Q40. Selected information from Jupiter Corp.’s financial activities in the year 2005 is as follows:

§           Net income was 18,300,000.

§           115,000 shares of common stock were outstanding on January 1.

§           The average market price per share was $150 in 2005.

§           Dividends were paid in 2005.

§           200 warrants, which each allow the holder to purchase 100 shares of common stock at an exercise price of $100 per common share, were outstanding the entire year.

§           60,000 shares of common stock were issued on April 1.

§           45,000 shares of common stock were purchased by the company as treasury stock on October 1.

Jupiter Corp.’s diluted earnings per share (Diluted EPS) for 2005 was closest to:

A)   $123.02.

B)   $117.75.

C)   $113.28.

Q41. Zachary Company’s warrants issued in 2000 are Zachary’s only outstanding potentially dilutive security. In 2005, EPS and

Dilutive EPS differed for the first time. A possible explanation for the change is the:

A)   average market price of Zachary increased.

B)   year-end market price of Zachary increased.

C)   average market price of Zachary decreased.

Q42. In the computation of diluted earnings per share (EPS), common shares issued when convertible preferred stock is converted are added to the denominator of the equation, and the basic EPS numerator is adjusted by:

A)   adding back non-convertible bond interest.

B)   adding back convertible preferred stock dividends.

C)   adding back non-convertible preferred stock dividends.

Q43. A 12 percent $100,000 convertible bond was issued on October 1, 2004. It is dilutive and can be converted into 18,000 shares.

The effective income tax rate for the year was 40%. What adjustments should be made to calculate diluted earnings per share?

Interest added to the numerator        Shares added to the denominator

A)       $12,000                          18,000

B)      $1,800                            4,500

C)      $12,000                          18,000

Q44. On December 31, 2004, JME Corporation had 350,000 shares of common stock outstanding. On September 1, 2005, an additional 150,000 shares of common stock were issued. In addition, JME had $10 million of 8% convertible bonds outstanding at December 31, 2004, which are convertible into 200,000 shares of common stock. Net income for 2005 was $3 million. Assuming an income tax rate of 40%, what amount should be reported as the diluted earnings per share for 2005?

A)   $5.80.

B)   $5.00.

C)   $6.00.

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