Deck 9: Earnings Per Share

Question 1

Glupotech reported profits of $300,000 this year. Its capital structure consists of 100,000 authorized preference shares with 10,000 outstanding. It had 600,000 ordinary shares authorized and outstanding. The company declared a $100,000 dividend. What was the company's basic EPS?

A) 1.00
B) 0.66
C) 0.50
D) 0.33
E) 0.25

Answer 1

0.33

Question 2

The basic EPS denominator is determined:

A) As the total number of shares as of the end of the period
B) As the total amount of shares as of the beginning of the period adjusted for the number of shares issued
C) By including newly issued share only for the period before their issuance dates.
D) Without including shares reacquired during the period at all.
E) None of the above.

Answer 2

None of the above.

Question 3

Given the following facts, compute the weighted average number of shares as of 31 December 20X1 for AdriaticAirlines. On 1 January 20X1, the company had 100,000 shares outstanding. On February 14, the company issued mandatorily convertible debt that was converted to 17,000 shares on November 1. On March 1, the company issued 12,000 shares as part of a settlement to a class action lawsuit brought by passengers from a rough landing during inclement weather. The settlement was finalized on June 30. The company issued 14,000 ordinary shares on August 1 to acquire a long-haul jumbo jet. The acquisition was finalized and the company took possession of the plane on February 2, 20X2. On October 15, the company repurchased 15,000 shares.

A) 128,583
B) 124,000
C) 117,750
D) 117,042
E) 111,542

Answer 3

117,750

Question 4

Kaniga LTD had earnings before taxes of $96,873. Interest expense was $57,289. The company had a tax rate of 38%. The company had 10,000 6% cumulative preference shares outstanding with a market value of $50,000. Authorized ordinary shares were 50,000, however only 35,000 were outstanding. Market value of the ordinary shares was $60,000. Compute basic EPS.

A) 2.73
B) 2.68
C) 1.71
D) 1.66
E) 1.16
F) 1.02

Question 5

Which of the following best describes the term "in the money"?

A) The average market price of an ordinary share exceeds the price of an option or warrant.
B) The exercise price of options or warrants is higher than the average market price of an ordinary share.
C) The average market price of an ordinary share reflects the required dividend payments in arrears to preferred shareholders.
D) The entity's incremental ordinary shares calculated when determining diluted EPS are assumed to be issued for no consideration.
E) The number of outstanding ordinary shares is lower for purposes of calculating diluted EPS is than it is for calculating basic EPS

Question 6

This year, Eberswalde had €25 million in profits. Eberswalde had 25,000 common shares and 5,000 preferred shares outstanding all year. Of these preferred shares, 2,500 are convertible into 3 common shares each. Eberswalde also had €5 million in convertible bonds with a face value of €1,000 each. Each of these bonds is convertible into 8 common shares. Eberswalde agreed to pay its main supplier of cast iron soundboards with 5,000 common shares. How many (potentially) dilutive common shares does Eberswalde have this year?

A) 77,500
B) 52,500
C) 47,500
D) None of the above

Question 7

Which of the following securities are potentially dilutive for purposes of calculating EPS?

A) Options granted at a strike price below the average share price this year
B) 5,000 debentures with a face value of €1,000 each convertible into 10 common shares
C) Share warrants issued at a strike price below the average share price this year
D) All of the above
E) None of the above

Question 8

Which of the following securities would always be considered dilutive for the current year?

A) Cumulative preferred shares convertible into 5 common shares each
B) 5,000 debentures with a face value of €1,000 each convertible into 10 common shares
C) Share warrants issued at a strike price below the average share price this year
D) All of the above
E) None of the above

Question 9

Which of the following securities are antidilutive?

A) Options granted at a strike price above the average share price this year
B) 5,000 debentures with a face value of €1,000 each convertible into 10 common shares
C) Share warrants issued at a strike price below the average share price this year
D) All of the above
E) More than one of the above

Question 10

Which of the following could not potentially be treated as an ordinary share?

A) Purchased options
B) Written put options
C) Contingently issuable shares
D) Contracts that will be settled in cash
E) All of the above are potentially treated as ordinary shares

Question 11

Sven's Great Grilled Cheese and Super Soup is a popular, publicly traded fast-food restaurant with locations throughout Europe. They had 200,000 common shares outstanding for the entire year. They also had 50,000 preferred shares that are convertible into 100,000 common shares. No conversions were made this year. Out of net income of €4 million, Sven's paid €1 million to preferred shareholders. The rest is available to ordinary equity holders. Calculate basic and diluted EPS.

A) Basic EPS - €15.00; Diluted EPS - €13.33
B) Basic EPS - €15.00; Diluted EPS - €10.00
C) Basic EPS - €20.00; Diluted EPS - €13.33
D) Basic EPS - €20.00; Diluted EPS - €10.00

Question 12

This year, Haidar?b?da Pl?s?ika, an Indian entity that tools plastic molds, agreed to distribute 5 million common shares to its employees (based on pay grade) if net income is at least ?25 million. Haidar?b?da Pl?s?ika had 25 million common shares outstanding all year. Assuming that net income was ?20 million, calculate basic EPS and diluted EPS.

A) Basic EPS - ?0.80; Diluted EPS - ?0.80
B) Basic EPS - ?0.67; Diluted EPS - ?0.67
C) Basic EPS - ?0.67; Diluted EPS - ?0.80
D) Basic EPS - ?0.80; Diluted EPS - ?0.67

Question 13

Gilkey, a hardware store in Christchurch, New Zealand, had $150,000 in convertible 6% bonds outstanding all year. Each bond has a face value of $1,000 and is convertible to 5 common shares. The corporate tax rate was 30% for Gilkey. What is the impact on diluted EPS?

A) $60.00
B) $42.00
C) $12.00
D) $8.40

Question 14

EPS is rarely used in calculating dividend payout ratio.

Question 15

EPS provides information useful primarily in retrospective analysis.

Question 16

The accrual method of accounting may present difficulties for investors comparing firms using EPS.

Question 17

There are circumstances in which an entity will increase the number of shares outstanding without a corresponding change in resources.

Question 18

A share dividend has no effect on EPS because the ownership percentage of ordinary shares does not change.

Question 19

In IAS 33, basic EPS should be displayed more prominently than diluted EPS because basic EPS is more important.

Question 20

Stock warrants are equally dilutive as stock options.

Question 21

Stock warrants are more dilutive than cumulative preferred shares.

Question 22

Extraordinary items deserve their own line when disclosing EP

Question 23

Eberswalde is a German piano manufacturer. Management decides that they will discontinue the 12 ft. grand piano because of negative contribution margins. Meanwhile, Eberswalde continues to generate considerable profits from their continuing operations. Eberswalde should only report overall basic EPS and overall diluted EPS.

Question 24

A reverse share split of ¹/₂:1 reduces ownership for all common shareholders.

Question 25

Diluted EPS is a hypothetical number.

Question 26

Gilkey, a hardware store in Christchurch, New Zealand, had $150,000 in convertible 6% bonds outstanding all year. Each bond has a face value of $1,000 and is convertible to 5 common shares. The corporate tax rate was 30% for Gilkey. Assume that the convertible 6% bonds have an impact of $15. Also assume that the convertible 6% bonds are the only potentially dilutive securities, and that Gilkey has a basic EPS of $(8.00). Are the convertible 6% bonds considered dilutive?

Question 27

Leiseberg Shipping located in Perth, Australia had the following shares oustanding:
a. January 1 - 100,000 shares outstanding (beginning balance)
b. June 15 - 50,000 options exercised giving the holders 3 shares for each option
c. June 30 - 2:1 share split
d. August 1 - 1:3 reverse share split
e. December 1 - 50,000 shares reacquired (as treasury shares)
Calculate the weighted average number of shares.

Question 28

Kobe Entity is calculating diluted EPS. Kobe's basic EPS is ¥5.00 (¥5 million net income attributed to common shareholders divided by 1 million common shares). Kobe's average share price throughout the year is $11 per share. The tax rate is 25% Kobe has several potentially dilutive securities as follows:
a. 50,000 options that were issued on April 1 at a strike price of $8. They can be converted into 50,000 common shares.
b. 80,000 warrants outstanding all year that can be converted into 80,000 common shares. The strike price is $12.
c. ¥3 million in 6% cumulative preferred shares convertible into 32,800 common shares outstanding all year with no dividends in arrears.
d. ¥5 million in 8% convertible bonds outstanding all year. Each has a face value of ¥1,000 and is convertible into 10 common shares.
Calculate Kobe's diluted EPS.

Question 29

Corcoran, Heiselberg and Associates (CHA) is a publicly traded law entity. In addition to 1.5 million common shares outstanding, the entity also has ₤2 million of 4% cumulative preferred shares convertible into 1 million common shares and ₤200,000 6% cumulative preferred shares that are both three years in arrears due to anemic profits. All shares have been outstanding for the past three years. This year, CHA had a profit of ₤50 million. Calculate basic and diluted EPS.