Exam 15: Earnings Per Share

Correct Answer:

Verified

$\begin{array}{|l|c|}\hline~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~&\textbf { A cumulative, }~~~~~~\\~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~&~\textbf { B non-cumulative)}~~~~\\\end{array}$
$\begin{array}{|l|l|r|}\hline \text { Net income } & & \$ 500,000 \\\hline \begin{array}{l}\text { Less: Preferred } \\\text { dividends "A" }\end{array} & \begin{array}{l}95,000 \times \\\$ 65 \times 2 \%\end{array} & (123,500) \\\hline \begin{array}{l}\text { Less: Preferred } \\\text { dividends "B" }\end{array} && \underline{~~~~~~~(0)} \\\hline \begin{array}{l}\text { NI available to } \\\text { ordinary } \\\text { shareholders }\end{array} & &\underline{\$ 376,500} \\\hline \text { Basic EPS } & \begin{array}{l}\$ 376,500 / \\210,000\end{array} & \underline{\underline{\$ 1.79}} \\\hline\end{array}$ Supporting comment-Dividends are neither declared nor paid.Supporting comment-dividends on the series A preferred are cumulative and accordingly are deducted from net income irrespective of whether they have been declared or paid.The dividends on the series B preferreds are non-cumulative in nature and are ignored for EPS purposes as they were not declared.

Correct Answer:

Verified

$\begin{array}{|lll|}\hline ~a.\\\textbf { Series } & \textbf { Dilutive or antidlilutive } & \textbf { Reason } \\\hline \text { A } & \text { Dilutive } & \text { Exercise price < average market price; in the money } \\\text { B } & \text { Dilutive } & \text { Most favourable exercise price < average market price; in the money } \\\text { C } & \text { Dilutive } & \text { Exercise price < average market price; in the money }\\\hline\end{array}$

\begin{array}{|l|}\hline\text { b. From part a, series A, B, and C are dilutive in nature. }\qquad\qquad\qquad\qquad\qquad\qquad\qquad\qquad\qquad\qquad\qquad~\\\hline\\end{array}
$\begin{array}{|l|l|l|c|}\hline \textbf { Series } & \textbf { Equation } & \textbf { Alternate equation } & \begin{array}{c}\textbf { \# of incremental shares } \\\textbf { to be issued }\end{array} \\\hline \text { A } & \begin{array}{l}\text { IS }=[(\mathrm{S}-\mathrm{K}) / \mathrm{S}] \times \mathrm{N} \times 6 / 12^{*} \\=[(60-58) / 60] \times 60,000 \times 6 / 12\end{array} & \text { IS }=\mathrm{N}(1-\mathrm{K} / \mathrm{S}) \times 6 / 12^{*} & 1,000 \\\hline \text { B } & \begin{array}{l}\text { IS }=[(\mathrm{S}-\mathrm{K}) / \mathrm{S}] \times \mathrm{N} \\=\left[\left(60-59^{* *}\right) / 60\right] \times 10,000\end{array} & \text { IS }=\mathrm{N}(1-\mathrm{K} / \mathrm{S}) & 167 \\\hline \mathrm{C} & \begin{array}{l}\text { IS }=[(\mathrm{S}-\mathrm{K}) / \mathrm{S}] \times \mathrm{N} \times 9 / 12^{*} \\=[(60-57) / 60] \times 45,000 \times 9 / 12\end{array} & \text { IS }=\mathrm{N}(1-\mathrm{K} / \mathrm{S}) \times 9 / 12^{*} & 1,688 \\\hline\end{array}$

IS = number of incremental shares to be issued; $\mathrm{K}=$ exercise price; $\mathrm{N}=$ number of shares that would have been issued for option exercise, $S=$ average market price

*The number of incremental shares to be notionally issued must be pro-rated as the options were not outstanding for the entire year.
** When more than one conversion option is available, the most dilutive alternative is assumed.