mouse123

Zimmer Co. had the following common shares outstanding:

• January 1, 2003: 50,000
• October 1, 2003: Issued 20,000 shares
• March 1, 2004: Issued a 10% stock dividend
• July 1, 2004: Declared a 2 for 1 stock split
• October 1, 2004: Repurchased 30,000 shares

Calculate the weighted average number of common shares outstanding for 2003 and 2004.

2003

2004

A) 55,000 124,500

B) 55,000 146,500

C) 10,000 124,000

---

For year 2003:
50,000 × 12 = 600,000
20,000 × 3 = 60,000
660,000/12 = 55,000
For year 2004:
70,000 × 1.1 × 2 = 154,000 × 12 = 1,848,000
(30,000) × 3 = (90,000)
1,758,000 / 12 = 146,500

mouse123

The SSP Company had 5 million shares outstanding on January 1. On February 15 the board of directors approved a 3:2 stock split, effective April 1. What is the weighted average number of shares outstanding for the SSP Company for year-end?

A) 6,875,000 shares.

B) 7,500,000 shares.

C) 5,625,000 shares.

---

Stock splits and stock dividends are applied to all shares that existed at the beginning of the period and shares that were issued or repurchased during the period, but prior to the split or dividend. For SSP, the 5 million beginning-of-year shares outstanding are adjusted to 7.5 million shares (5.0 × 3/2) as a result of the 3:2 split.

mouse123

A complex capital structure would typically contain:

A) convertible bonds.

B) variable rate notes.

C) bank notes.

---

A complex capital structure is one that contains securities that have the potential to dilute a firm’s earnings per share. For example, convertible bonds, convertible preferred stock, options, and warrants have the potential to dilute earnings per share upon conversion or exercise.

mouse123

A firm with a capital structure consisting of only common stock and non-convertible bonds is said to have a:

A) simple capital structure.

B) non-diluted capital structure.

C) straight capital structure.

---

A simple capital structure is one that contains no securities that have the potential to dilute a firm’s earnings per share. For example, convertible bonds, convertible preferred stock, options, and warrants have the potential to dilute earnings per share upon conversion or exercise.

mouse123

Which type of a capital structure contains no dilutive securities?

A) Simple.

B) Basic.

C) Complex.

---

A complex capital structure contains potentially dilutive securities such as options, warrants, or convertible securities. There is no basic capital structure but there are basic earnings per share which does NOT consider the effects of any dilutive securities in the computation of EPS.

mouse123

Juniper Corp’s stock transactions during the year 20X4 were as follows:

• January 1            540,000 shares issued and outstanding
• March 1              50 percent stock dividend
• July 1                 180,000 treasury shares reacquired
• October 1            60,000 treasury shares reissued

When computing for earnings per share (EPS) computation purposes, what was Juniper’s weighted average number of shares outstanding during 20X4?

A) 930,000.

B) 735,000.

C) 870,000.

---

The January 1 balance is adjusted retroactively for the stock dividend and (540,000 × 1.5) = 810,000 shares are treated as outstanding from January 1. The weighted average number of shares is computed by multiplying the shares by the number of months held, as follows:

January 1	Initial shares	(810,000 × 12) =	9,720,000
July 1	Reacquired shares	(-180,000 × 6) =	1,080,000
October 1	Reissued shares	(60,000 × 3) =	180,000
			8,820,000

Weighted average shares was (8,820,000 / 12) = 735,000 shares.

mouse123

Jersey, Inc.’s financial information included the following for its year ended December 31:

• 160,000 shares of common stock were outstanding for the entire year.
• 18,000 shares of 10%, $100 par value cumulative preferred stock were outstanding for the entire year.
• Common stock dividends paid during the current year were $240,000.
• All preferred stock dividends were paid for the current year.
• Net income was $720,000.

Basic earnings per share for Jersey, Inc. for the year ended December 31 are closest to:

A) $3.38.

B) $4.50.

C) $2.81.

---

Jersey, Inc.’s basic EPS = (net income – preferred dividends) / (weighted average number of common shares outstanding) was ($720,000 - $180,000)/160,000 = $3.38.

mouse123

Bluff, Inc.’s stock transactions during the year were as follows:

• January 1                      90,000 common shares outstanding.

• April 1                           20% stock dividend is declared and issued.

• October 1                     10,000 shares are reacquired as treasury stock.

What is Bluff’s weighted average number of shares outstanding during the year?

A) 105,500.

B) 98,000.

C) 101,000.

---

Initial shares: 90,000 × 1.20 =	108,000
– Reacquired treasury shares: 10,000 × 3/12 =	–2,500
	105,500

mouse123

A complex capital structure, for purposes of determining disclosure of diluted Earnings Per Share, is distinguished from a simple capital structure by the:

A) company having issued warrants, convertible securities, or options.

B) company's use of debt to finance its operations.

C) company having preferred stock outstanding.

---

A complex structure contains potentially dilutive securities such as options warrants or convertible securities. Where as simple capital structures contain no potentially dilutive securities and contains only common stock and non-convertible securities.

mouse123

Which of the following securities would least likely be found in a simple capital structure?

A) 6%, $5000 par value putable bond.

B) 7%, $100 par value non convertible preferred.

C) 3%, $100 par value convertible preferred.

---

A simple capital structure contains no potentially dilutive securities such as stock options, warrants, or convertible preferred stock.