Chapter 16-Dilutive Securities and Earnings per Share

Question 1

Antidilutive securities

Answer 1

Securities which upon conversion or exercise increase earnings per share (or reduce the loss per share).

Question 2

Book value approach

Answer 2

A method used for determining the issue price of stock when bonds are converted into stock which records the stock issued using the book value of the bonds at the issue date.

Question 3

Complex capital structure

Answer 3

When a corporation’s capital structure includes securities that could have a dilutive effect on earnings per common share.

Question 4

Convertible bonds

Answer 4

A security that combines the benefits of a bond with the privilege of exchanging it for stock at the holder’s option.

Question 5

Convertible preferred stock

Answer 5

Preferred stock which is convertible into common stock at the holder’s option.

Question 6

Detachable stock warrants

Answer 6

Warrants that can be sold separately from their bonds.

Question 7

Diluted earnings per share

Answer 7

Earnings per share based on the number of common shares outstanding plus all contingent issuances of common stock that could reduce earnings per share.

Question 8

Dilutive securities

Answer 8

Securities that are not common stock in form, but enable their holders to obtain common stock upon exercise or conversion. Examples include convertible bonds, convertible preferred stocks, stock warrants, and contingent shares.

Question 9

Earnings per share

Answer 9

The income earned by each share of common stock.

Question 10

Grant date

Answer 10

The date someone receives stock options.

Question 11

If-converted method

Answer 11

The method used to measure the dilutive effect of convertible securities which assumes (1) the conversion of the convertible securities at the beginning of the period (or at the time of issuance of the security, if issued during the period), and (2) the elimination of interest, net of tax or preferred dividend.

Question 12

Induced conversion

Answer 12

When an issuer wishes to induce prompt conversion of its convertible debt to equity securities, the issuer may offer some form of additional consideration (such as cash or common stock).

Question 13

Market value approach

Answer 13

A method used for determining the issue price of stock when bonds are converted into stock which records the stock issued using its market price at the issue date.

Question 14

Measurement date

Answer 14

The first date on which are known both (1) the number of shares that an individual employee is entitled to receive and (2) the option or purchase price.

Question 15

Nondetachable stock warrants

Answer 15

Warrants that cannot be sold separately from their bonds.

Question 16

Restricted stock plans

Answer 16

Stock plans that transfer shares of stock to employees, subject to an agreement that the shares cannot be sold, transferred or pledged until vesting occurs.

Question 17

Service period

Answer 17

The period in which the employee performs the service for which he or she is being compensated.

Question 18

Simple capital structure

Answer 18

When a corporation’s capital structure consists only of common stock or includes no potentially dilutive convertible securities, options, warrants, or other rights that upon conversion or exercise could in the aggregate dilute earnings per common share.

Question 19

Stock appreciation rights (SARs)

Answer 19

Similar to a stock option plan except executives do not have to purchase the stock but instead are given a right to receive the excess of the market price of the stock at the date of exercise over a pre-established price.

Question 20

Stock option

Answer 20

A warrant which gives selected employees the option to purchase common stock at a given price over an extended period of time.

Question 21

Stock option plans

Answer 21

Long-term compensation plans which attempt to develop in executives a strong loyalty toward the company by giving them an equity interest based on changes in long-term measures such as increases in earnings per share, revenues, stock price, or market share.

Question 22

Stock rights

Answer 22

Existing stockholders have the right (preemptive privilege) to purchase newly issued shares in proportion to their holdings.

Question 23

Stock warrants

Answer 23

Certificates entitling the holder to acquire shares of stock at a certain price within a stated period.

Question 24

Sweetner

Answer 24

The additional consideration offered by an issuer that wishes to set up an induced conversion.

Question 25

Treasury stock method

Answer 25

The method used to measure the dilutive effect of options and warrants which assumes (1) the options or warrants are exercised at the beginning of the year (or date of issue if later), and (2) the proceeds from the exercise of options and warrants are used to purchase common stock for the treasury.

Question 26

Weighted average number of shares outstanding

Answer 26

The basis for the per share amounts reported which reflects shares issued or purchased during the period by calculating the number of shares outstanding by the fraction of the period they are outstanding.