andytrader

For a firm with a simple capital structure, all of the following are necessary to measure basic earnings per share (EPS) EXCEPT:

A) the timing and number of shares issued or repurchased during the year.

B) dividends paid to preferred shareholders.

C) dividends paid to common shareholders.

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Basic EPS = earnings available to common shareholders divided by the weighted average number of common shares outstanding. Earnings available to common shareholders equals net income minus preferred dividends.

andytrader

Washington, Inc.’s stock transactions during the year 20X4 were as follows:

January 1	720,000 shares issued and outstanding
May 1	2 for 1 stock split occurred

What was Washington’s weighted average number of shares outstanding during 20X4, for earnings per share (EPS) computation purposes?

A) 1,500,000.

B) 1,440,000.

C) 1,666,667.

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The January 1 balance is adjusted retroactively for the stock split and (720,000 × 2 =) 1,440,000 shares are treated as outstanding from January.

andytrader

A firm has a weighted average number of 20,000 common shares selling at an average of $10 throughout the year and 11,000, 10%, $100 par value preferred shares. If the firm earns $210,000 after taxes, what is its Basic EPS?

A) $7.50 / share.

B) $5.00 / share.

C) $10.50 / share.

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(210,000 − 110,000) / 20,000 = $5 share

andytrader

Zichron, Inc., had the following equity accounts on December 31:

• 
  Common stock: 20,000 shares.
• 
  Preferred stock A: 10,000 shares convertible into common on a 2 for 1 basis, dividend of $40,000 was declared during the year.
• 
  Preferred stock B: 10,000 shares, convertible to common on a 4 for 1 basis, dividend of $5,000 was declared during the year.
• 
  The company reported net income of $120,000 and paid a $20,000 dividend to its common shareholders.

What are the basic earnings per share reported for the year?

A) $2.75.

B) $3.75.

C) $2.00.

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($120,000 − 40,000 − 5,000) / 20,000 shares = $3.75.

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What are the diluted earnings per share reported for the year?

A) $3.00.

B) $1.50.

C) $1.33.

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($120,000) / (20,000 + 20,000 + 40,000) = $1.50.

andytrader

An analyst gathered the following information about a company:

• 01/01/04 - 50,000 shares issued and outstanding at the beginning of the year
• 04/01/04 - 5% stock dividend
• 10/01/04 - 10% stock dividend

What is the company’s weighted average number of shares outstanding at the end of 2004?

A) 57,750.

B) 57,500.

C) 55,000.

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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. Dividends and splits are applied to all shares issued or repurchased and all original or adjusted shares outstanding prior to the split or dividend.

Step 1) Apply the 04/01/04 dividend to the beginning-of-year shares: Adjusted shares = 1.05 × 50,000 = 52,500

Step 2) Apply the 10/01/04 dividend the adjusted beginning-of-year shares. Adjusted beginning of year shares = 57,750 (= 1.1 × 52,500).

Step 3) Compute the weighted average number of shares. 57,750 × (12/12) = 57,750 shares.

andytrader

Last year, the AKB Company had net income equal to $5 million. Combined state and local taxes were 45%. The firm paid $1 million to holders of its 1 million common shares and $250,000 to 100,000 preferred shareholders. What was AKB's earnings per share (EPS) last year?

A) $2.25.

B) $4.75.

C) $2.50.

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EPS = earnings available to common shareholders divided by the weighted average number of common shares outstanding. Earnings available to common shareholders is net income minus preferred dividends, or $4,750,000 (= $5 million – 250,000) for AKB.

andytrader

At the beginning of 2004, the Alaska Corporation had 2 million shares of common stock outstanding and no preferred stock. At the end of August, 2004, Alaska issued 600,000 new shares of common stock. If Alaska reported net income equal to $8.8 million, what was the firm’s earnings per share for 2004?

A) $3.38.

B) $4.00.

C) $3.67.

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EPS = earnings available to common shareholders divided by the weighted average number of common shares outstanding. With no preferred shareholders, all of net income is available to the common shareholders. The weighted average number of shares outstanding equals the original 2 million shares plus 4/12 of the additional 600,000 shares. The 4/12 weight is used because the new shares were only outstanding 4 months of the year. Thus, EPS = $8.8 million / [2 million + (4/12)(600,000)] = 8.8/2.2 = $4.00.

andytrader

Maine Company’s stock transactions during the year are described below:

• 
  January 1                               100,000 common shares outstanding
• 
  March 1                                  2 for 1 stock split
• 
  August 1                                10% stock dividend

The weighted average number of shares outstanding used to calculate earnings per share is:

A) 220,000.

B) 211,111.

C) 201,666.

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The January 1 balance of common shares outstanding is adjusted retroactively for both stock dividends and stock splits. The weighted average shares outstanding for the year = 100,000 × 2 × 1.1 = 220,000.

andytrader

Suppose that JPK, Inc., paid dividends of $80,000 to its preferred shareholders and $40,000 to its common shareholders during 2004. The company had 20,000 shares of common stock issued and outstanding on January 1, 2004, issued 7,000 more shares on June 1, 2004, and paid a 10% stock dividend on August 1, 2004. Assuming that JPK had $150,000 in net income, what is the firm’s basic earnings per share (EPS) for 2004?

A) $2.64.

B) $2.71.

C) $2.91.

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1/1/00 22,000 shares (adjusted for 10% stock dividend) × 12 months = 264,000
6/1/00 7,700 shares (adjusted for 10% stock dividend) × 7 months = 53,900
Total share month = 317,900
Average shares = 317,900 / 12 = 26,492Basic EPS = ($150,000 − $80,000) / 26,492 = 2.64

andytrader

The following data pertains to the Megatron 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.

How many common shares should be used in computing the company’s basic earnings per share (EPS)?

A) 5,000.

B) 4,500.

C) 5,500.

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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 shares
60,000 shares / 12 months = 5,000 average shares