E16-18 EPS: Simple Capital Structure

Flagstad Inc. presented the following data.

Net income
Preferred stock: 50,000 shares outstanding, $100 par, 8% cumulative, not convertible
Common stock
Shares outstanding 1/1
Issued for cash, 5/1
Acquired treasury stock for cash, 8/1
2-for-1 stock split, 10/1

Instructions
Compute earnings per share.

Dates Shares Stock Split Number

Event Outstanding Outstanding Restatement of months
Beginning balance
Issued shares
Reacquired shares
Stock split
Weighted-average number of shares outstanding

Net Income - Preferred Dividends -

Earnings per share = =
Weighted-Average Shares
2,500,000
5,000,000

750,000
300,000
150,000

/12 Weighted
months Shares
12
12
12
12 -
-

=
E16-18 EPS: Simple Capital Structure

Flagstad Inc. presented the following data.

Net income 2,500,000

Preferred stock: 50,000 shares outstanding, $100 par, 8% cumulative, not convertible 5,000,000
Common stock: Shares outstanding 1/1 750,000
Issued for cash, 5/1 300,000
Acquired treasury stock for cash, 8/1 150,000
2-for-1 stock split, 10/1

Instructions
Compute earnings per share.

Dates Shares Stock Split Number /12 Weighted

Event Outstanding Outstanding Restatement of months months Shares
Beginning balance Jan 1 - May 1 750,000 2 4 12 500,000
Issued shares May 1 - Aug 1 1,050,000 2 3 12 525,000
Reacquired shares Aug 1 - Oct 1 900,000 2 2 12 300,000
Stock split Oct 1 - Dec 31 1,800,000 1 3 12 450,000
Weighted-average number of shares outstanding 1,775,000

Net Income - Preferred Dividends 2,500,000 - 400,000

Earnings per share = = = 1.18
Weighted-Average Shares 1,775,000
E16-16 EPS: Simple Capital Structure

On January 1, 2015, Wilke Corp. had 480,000 shares of common stock outstanding. During 2015, it had the following transactions
that affected the Common Stock account:

1-Feb Issued 120,000 shares

1-Mar Issued a 10% stock dividend
1-May Acquired 100,000 shares of treasury stock
1-Jun Issued a 3-for-1 stock split
1-Oct Reissued 60,000 shares of treasury stock

Instructions
(a) Compute the weighted-average number of shares outstanding as of December 31, 2015.

Dates Shares Stock Dividend Stock Split Number /12 Weighted

Event Outstanding Outstanding Restatement Restatement of months months Shares

Weighted-average number of shares outstanding: -

(b) Assume that Wilke Corp earned net income of $3,456,000 during 2015. In addition, it had 100,000 shares of 9%, $100 par nonconvertible,
noncumulative preferred stock outstanding for the entire year. Because of liquidity considerations, however, the company did not declare
and pay a preferred dividend in 2015. Compute earnings per share for 2015, using the weighted-average number of shares determined
in part (a).

No dilutive securities, so computing Basic EPS:

Net Income - Preferred Dividends

Earnings per share = = = #DIV/0!
Weighted-Average Shares
(c) Assume the same facts as in part (b), except that the preferred stock was cumulative. Compute earnings per share for 2015.

No dilutive securities, so computing Basic EPS:

Net Income - Preferred Dividends

Earnings per share = = = #DIV/0!
Weighted-Average Shares

(d) Assume the same facts as in part (b), except that net income included an extraordinary gain of $864,000 and a loss from
discontinued operations of $432,000. Both items are net of applicable income taxes. Compute earning per share for 2015.

Net Income
Deduct extraordinary gain
Add loss from discontinued operations
Income from continuing operations: -

EPS:
Income from continuing operations
Loss from discontinued operations
Income before extraordinary item -
Extraordinary gain
Net income -
E16-16 EPS: Simple Capital Structure

On January 1, 2015, Wilke Corp. had 480,000 shares of common stock outstanding. During 2015, it had the following transactions
that affected the Common Stock account:

1-Feb Issued 120,000 shares

1-Mar Issued a 10% stock dividend
1-May Acquired 100,000 shares of treasury stock
1-Jun Issued a 3-for-1 stock split
1-Oct Reissued 60,000 shares of treasury stock

Instructions
(a) Compute the weighted-average number of shares outstanding as of December 31, 2015.

Dates Shares Stock Dividend Stock Split Number /12 Weighted

Event Outstanding Outstanding Restatement Restatement of months months Shares
Beginning balance Jan 1 - Feb 1 480,000 1.1 3.0 1 12 132,000
Issued shares Feb 1 - March 1 600,000 1.1 3.0 1 12 165,000
Stock dividend March 1 - May 1 660,000 3.0 2 12 330,000
Reacquired shares May 1 - June 1 560,000 3.0 1 12 140,000
Stock split June 1 - Oct 1 1,680,000 4 12 560,000
Reissued shares Oct 1 - Dec 31 1,740,000 3 12 435,000
Weighted-average number of shares outstanding: 1,762,000

(b) Assume that Wilke Corp earned net income of $3,456,000 during 2015. In addition, it had 100,000 shares of 9%, $100 par nonconvertible,
noncumulative preferred stock outstanding for the entire year. Because of liquidity considerations, however, the company did not declare
and pay a preferred dividend in 2015. Compute earnings per share for 2015, using the weighted-average number of shares determined
in part (a).

No dilutive securities, so computing Basic EPS:

Net Income - Preferred Dividends 3,456,000

Earnings per share = = = 1.96
Weighted-Average Shares 1,762,000
(c) Assume the same facts as in part (b), except that the preferred stock was cumulative. Compute earnings per share for 2015.

No dilutive securities, so computing Basic EPS:

Net Income - Preferred Dividends 3,456,000 - 900,000

Earnings per share = = = 1.45
Weighted-Average Shares 1,762,000

(d) Assume the same facts as in part (b), except that net income included an extraordinary gain of $864,000 and a loss from
discontinued operations of $432,000. Both items are net of applicable income taxes. Compute earning per share for 2015.

Net Income 3,456,000

Deduct extraordinary gain (864,000)
Add loss from discontinued operations 432,000
Income from continuing operations: 3,024,000

EPS:
Income from continuing operations $3,024,000/1,762,000 = 1.72
Loss from discontinued operations $432,000/1,762,000 = (0.25)
Income before extraordinary item 1.47
Extraordinary gain $864,000/1,762,000 = 0.49
Net income 1.96
E16-23 EPS with Convertible Bonds

On June 1, 2012, Andre Company and Agassi Company merged to form Lancaster Inc. A total of 800,000 shares were issued
to complete the merger. The new corporation reports on a calendar-year basis.

On April 1, 2014, the company issued an additional 400,000 shares of stock for cash. All 1,400,000 shares were outstanding on December 31, 2014.

Lancaster Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2014. Each $1,000 bond converts to 40 shares of common
at any interest date. None of the bonds have been converted to date.

Lancaster Inc. is preparing its annual report for the fiscal year ending December 31, 2014. The annual report will show earnings
per share figures based on a reported after tax net income of $1,540,000. (The tax rate is 40%.)

Instructions
Determine the following for 2014:
(a) The number of shares to be used for calculating:
(1) Basic earnings per share.
Dates Shares Number /12 Weighted
Event Outstanding Outstanding of months months Shares
Beginning balance 12 -
Issued shares 12 -
Weighted-average number of shares outstanding: -

(2) Diluted earnings per share.

Dates Shares Number /12 Weighted

Event Outstanding Outstanding of months months Shares
Beginning balance 12 -
Issued shares 12 -
Issued convertible bonds* 12 -
Weighted-average number of shares outstanding: -

*Calculation of shares form convertible bonds:

 x = #DIV/0!

(b) The earnings figures to be used for calculating:

(1) Basic earnings per share.

(No preferred dividends.)

(2) Diluted earnings per share.

After-tax net income -
Add back interest on convertible bonds:

-
Earnings for diluted EPS -

(c) Basic and Diluted EPS

(1) Basic earnings per share.

Net Income - Preferred Dividends

Earnings per share = = = #DIV/0!
Weighted-Average Shares

(2) Diluted earnings per share.

First, test for dilution:

Interest on convertible bonds (net of tax)
= = #DIV/0!
Converted common shares (for 6/12 of year)

Compare to the basic EPS above, and it is less, so the convertible bonds are dilutive.

Now, calculate diluted EPS:

Earning for diluted EPS

Earnings per share = = = #DIV/0!
Weighted-Average Shares
E16-23 EPS with Convertible Bonds

On June 1, 2012, Andre Company and Agassi Company merged to form Lancaster Inc. A total of 800,000 shares were issued
to complete the merger. The new corporation reports on a calendar-year basis.

On April 1, 2014, the company issued an additional 400,000 shares of stock for cash. All 1,400,000 shares were outstanding on December 31, 2014.

Lancaster Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2014. Each $1,000 bond converts to 40 shares of common
at any interest date. None of the bonds have been converted to date.

Lancaster Inc. is preparing its annual report for the fiscal year ending December 31, 2014. The annual report will show earnings
per share figures based on a reported after tax net income of $1,540,000. (The tax rate is 40%.)

Instructions
Determine the following for 2014:
(a) The number of shares to be used for calculating:
(1) Basic earnings per share.
Dates Shares Number /12 Weighted
Event Outstanding Outstanding of months months Shares
Beginning balance Jan 1 - April 1 800,000 3 12 200,000
Issued shares April 1 - Dec 31 1,200,000 9 12 900,000
Weighted-average number of shares outstanding: 1,100,000

(2) Diluted earnings per share.

Dates Shares Number /12 Weighted
Event Outstanding Outstanding of months months Shares
Beginning balance Jan 1 - April 1 800,000 3 12 200,000
Issued shares April 1 - July 1 1,200,000 3 12 300,000
Issued convertible bonds* July 1 - Dec 31 1,224,000 6 12 612,000
Weighted-average number of shares outstanding: 1,112,000

*Calculation of shares form convertible bonds:

600,000 x 40 = 24,000
1,000
(b) The earnings figures to be used for calculating:
(1) Basic earnings per share.
After-tax net income 1,540,000
(No preferred dividends.)

(2) Diluted earnings per share.

After-tax net income 1,540,000
Add back interest on convertible bonds:
Interest ($600,000 x 8% x 6/12) 24,000
Less income taxes (40%) 9,600 14,400
Earnings for diluted EPS 1,554,400

(c) Basic and Diluted EPS

(1) Basic earnings per share.

Net Income - Preferred Dividends 1,540,000

Earnings per share = = = 1.4000
Weighted-Average Shares 1,100,000

(2) Diluted earnings per share.

First, test for dilution:

Interest on convertible bonds (net of tax) 14,400
= = 1.20
Converted common shares (for 6/12 of year) 12,000

Compare 1.20 to the 1.23 basic EPS above, and it is less, so the convertible bonds are dilutive.

Now, calculate diluted EPS:

Earning for diluted EPS 1,554,400

Earnings per share = = = 1.3978
Weighted-Average Shares 1,112,000
E16-28 EPS with Warrants

Howat Corporation earned $360,000 during a period when it had an average of 100,000 shares of common stock outstanding.
The common stock sold at an average market price of $15 per share during the period. Also outstanding were 15,000 warrants
that could be exercised to purchase one share of common stock for $10 for each warrant exercised.

Instructions
(a) Are the warrants dilutive?

(b) Compute basic earnings per share.

Net Income - Preferred Dividends

Basic EPS = = = #DIV/0!
Weighted-Average Shares

(c) Compute diluted earnings per share.

Using the treasury-stock method, so first calculate the incremental shares issued:
(using formula found on page 907 in textbook)

Market Price - Option Price Number of options

Incremental Shares = x
Market Price or warrants

- #DIV/0!
Incremental Shares = x =

Diluted EPS = = #DIV/0!

E16-28 EPS with Warrants

Howat Corporation earned $360,000 during a period when it had an average of 100,000 shares of common stock outstanding.
The common stock sold at an average market price of $15 per share during the period. Also outstanding were 15,000 warrants
that could be exercised to purchase one share of common stock for $10 for each warrant exercised.

Instructions
(a) Are the warrants dilutive?

The warrants are dilutive because the average market price ($15) is greater than the option price of ($10).

(b) Compute basic earnings per share.

Net Income - Preferred Dividends 360,000

Basic EPS = = = 3.60
Weighted-Average Shares 100,000

(c) Compute diluted earnings per share.

Using the treasury-stock method, so first calculate the incremental shares issued:
(using formula found on page 907 in textbook)

Market Price - Option Price Number of options

Incremental Shares = x
Market Price or warrants

15 - 10 15,000 5,000
Incremental Shares = x =
15

360,000
Diluted EPS = = 3.43
105,000
P16-5 EPS with Complex Capital Structure
Amy Dyken, controller at Fitzgerald Pharmaceutical Industries, a public company, is currently preparing the calculation for basic and
diluted earnings per share and the related disclosure for Fitzgerald's financial statements. Below is selected financial information
for the fiscal year ended June 30, 2012.
Fitzgerald Pharmaceutical Industries
Selected Balance Sheet Information
June 30, 2012
Long-term debt
Notes payable, 10% 1,000,000
8% convertible bonds payable 5,000,000
10% bonds payable 6,000,000
Total long-term debt 12,000,000

Shareholders' equity
Preferred stock, 6% cumulative, $50 par value, 100,000
shares authorized, 25,000 shares issued and outstanding 1,250,000
Common stock, $1 par, 10,000,000 shares authorized,
1,000,000 shares issued and outstanding 1,000,000
Additional paid-in capital 4,000,000
Retained earnings 6,000,000
Total shareholders' equity 12,250,000
The following transactions have also occurred at Fitzgerald.
1 Options were granted on July 1, 2011, to purchase 200,000 shares at $15 per share. Although no options were exercised during fiscal
year 2012, the average price per common share during fiscal year 2012 was $20 per share.
2 Each bond was issued at face value. The 8% convertible bonds will convert into common stock at 50 shares per $1,000 bond. The bonds
are exercisable after 5 years and were issued in fiscal year 2011.
3 The preferred stock was issued in 2011.
4 There are no preferred dividends in arrears; however preferred dividends were not declared in fiscal year 2012.
5 The 1,000,000 shares of common stock were outstanding for the entire 2012 fiscal year.
6 Net income for fiscal year 2012 was $1,500,000, and the average income tax rate is 40%.
Instructions
For the fiscal year ended June 30, 2012, calculate the following for Fitzgerald Pharmaceutical Industries:
(a) Basic earnings per share.

Basic earnings Net Income - Preferred Dividends* -

= = = #DIV/0!
per share Weighted-Average Shares

*Preferred dividends =

(b) Diluted earnings per share.

First step, test for dilution:

Convertible Bonds
Interest on convertible bonds (net of tax)
= = = #DIV/0!
Converted common shares

Stock Options

Market Price - Option Price Number of

Incremental Shares = x options or
Market Price warrants

- #DIV/0!
Incremental Shares = x =

Now, calculate Diluted EPS:

Diluted earnings Net Income - Preferred Dividends + Interest (net of tax)

=
per share Average Common Shares + Potentially Dilutive Common Shares

Diluted earnings
= = = #DIV/0!
per share
P16-5 EPS with Complex Capital Structure
Amy Dyken, controller at Fitzgerald Pharmaceutical Industries, a public company, is currently preparing the calculation for basic and
diluted earnings per share and the related disclosure for Fitzgerald's financial statements. Below is selected financial information
for the fiscal year ended June 30, 2014.
Fitzgerald Pharmaceutical Industries
Selected Balance Sheet Information
June 30, 2014
Long-term debt
Notes payable, 10% 1,000,000
8% convertible bonds payable 5,000,000
10% bonds payable 6,000,000
Total long-term debt 12,000,000

Shareholders' equity
Preferred stock, 6% cumulative, $50 par value, 100,000
shares authorized, 25,000 shares issued and outstanding 1,250,000
Common stock, $1 par, 10,000,000 shares authorized,
1,000,000 shares issued and outstanding 1,000,000
Additional paid-in capital 4,000,000
Retained earnings 6,000,000
Total shareholders' equity 12,250,000
The following transactions have also occurred at Fitzgerald.
1 Options were granted on July 1, 2013, to purchase 200,000 shares at $15 per share. Although no options were exercised during fiscal
year 2014, the average price per common share during fiscal year 2014 was $20 per share.
2 Each bond was issued at face value. The 8% convertible bonds will convert into common stock at 50 shares per $1,000 bond. The bonds
are exercisable after 5 years and were issued in fiscal year 2013.
3 The preferred stock was issued in 2013.
4 There are no preferred dividends in arrears; however preferred dividends were not declared in fiscal year 2014.
5 The 1,000,000 shares of common stock were outstanding for the entire 2014 fiscal year.
6 Net income for fiscal year 2014 was $1,500,000, and the average income tax rate is 40%.
Instructions
For the fiscal year ended June 30, 2014, calculate the following for Fitzgerald Pharmaceutical Industries:
(a) Basic earnings per share.

Basic earnings Net Income - Preferred Dividends* 1,500,000 - 75,000

per share = = = 1.4250
Weighted-Average Shares 1,000,000

*Preferred dividends = 25,000 x $50 x 6% = 75,000

(b) Diluted earnings per share.

First step, test for dilution:

Convertible Bonds
Interest on convertible bonds (net of tax) $5,000,000 x 8% x (100% - 40%) 240,000
= = = 0.960
Converted common shares ($5,000,000/$1,000)*50 250,000

Compare .96 to the 1.425 basic EPS above, and it is less, so the convertible bonds are dilutive.

Stock Options
Average market price ($20) > option price ($15), so the stock options are dilutive.

Market Price - Option Price Number of

Incremental Shares = x options or
Market Price warrants

20 - 15 200,000 50,000
Incremental Shares = x =
20
Now, calculate Diluted EPS:

Diluted earnings Net Income - Preferred Dividends + Interest (net of tax)

per share =
Average Common Shares + Potentially Dilutive Common Shares

Diluted earnings $1,500,000 - $75,000 + $240,000 1,665,000

= = = 1.281
per share 1,000,000 + 250,000 + 50,000 1,300,000