Chapter 19 Flashcards
True or False: earnings per share does not have the most media attention
False: It does
What is Earnings per Share, in its most elemental setting
In the most elemental setting, earnings per share (or net loss per share) is merely a firm’s net income (or net loss) divided by the number of shares of common stock outstanding throughout the year.
A firm is said to have a simple capital structure if it has no outstanding securities that could potentially dilute earnings per share. True or false?
True
what is Basic EPS?
simply income available to common shareholders divided by the weighted-average number of common shares outstanding.
Which three situations makes EPS more demanding?
(a) when the number of shares has changed during the reporting period, (b) when the earnings available to common shareholders are diminished by dividends to preferred shareholders, or (c) when we attempt to take into account the impending effect of potential common shares
Net Income: 154 million Tax Rate: %40 Capital Structure: 60 million shares outstanding on Jan 1st. What is Basic EPS?
Net Income/Shares Outstanding 154 / 60 = $2.57
Net Income: 154 m Capital Structure: 60 million shares outstanding on Jan 1st. Issuance of Shares Mar 1: 12 m sold Tax Rate: %40 What is Basic EPS now with issuance of shares??
Net Income/Shares Outstanding + New Shares (x10/12 since 10 months left) 154 / 60 + 12(10/12) = 154 / 70 = $2.20
Define a Stock Dividend/Split
A distribution of additional shares to EXISTING shareholders.
Shares being “sold” is the same as shares being “issued”. True or False?
True
Difference between a stock dividend or stock split merely increases the number of shares without affecting the firm’s assets.
A stock dividend or stock split merely increases the number of shares without affecting the firm’s assets. The same pie is divided into more pieces. The result is a larger number of less valuable shares On the other hand, when new shares are sold, both assets and shareholders’ equity are increased by an additional investment in the firm by shareholders
When issuing new shares, multiply them by the previous months in the year. True or false? 10 Shares Sold Feb 1. would be 10 (1/12)
False. Multiply them by fraction of year outstanding. 10 (11/12)
Shares outstanding prior to the stock dividend are proactively restated to reflect the % increase in shares—that is, treated as if the distribution occurred at the beginning of the period. True or False?
False - Shares outstanding prior to the stock dividend are retroactively restated to reflect the % increase in shares—that is, treated as if the distribution occurred at the beginning of the period
Net Income: 154 m Capital Structure: 60 million shares outstanding on Jan 1st. Issuance of Shares Mar 1: 12 m sold Stock Dividend June 17: 10% Tax Rate: %40 What is Basic EPS now that there’s a stock dividend?
Net Income / Shares Outstanding (1.10) + New Shares Issued x Fraction (1.10) ***Multiply all components of denominator by 1.10 no matter when it is purchased. 154 / 60 (1.10) + 12 (10/12) *(1.10) = 154 / 77 = $2.00
In stock dividends or splits, each shareholder’s interest is represented by more—though less valuable—shares. True or False?
True. Unlike a sale of new shares, this should not be interpreted as a “dilution” of earnings per share. Shareholders’ interests in their company’s earnings have not been diluted.
The number of reacquired shares is time-weighted for the fraction of the year they were outstanding. True or False?
False. he number of reacquired shares is time-weighted for the fraction of the year they were NOT outstanding, prior to being subtracted from the number of shares outstanding during the period
Net Income: 154 m Capital Structure: 60 million shares outstanding on Jan 1st. Issuance of Shares Mar 1: 12 m sold Stock Dividend June 17: 10% Shares Reacquired Oct. 1st: 8 m Tax Rate: %40 What is Basic EPS now that there are shares reacquired?
Net Income / Shares Outstanding (1.10) + New Shares Issued x Fraction (1.10) - Treasury Shares Reacquired 154/ 60 (1.10) + 12 (10/12)(1.10) - 8(3/12) = 154/75 = $2.05 ***Shares are subtracted when reacquired, whereas they are added when sold. ***Don’t multiply it by (1.10) since purchased AFTER June 17th
The denominator in an EPS calculation is the weighted-average number of common shares outstanding. Logically, the numerator should similarly represent earnings available to common shareholders. True or False?
False. It does make logical sense, but But when a senior class of shareholders (like preferred shareholders) is entitled to a specified allocation of earnings (like preferred dividends), those amounts are subtracted from earnings before calculating earnings per share. Thus, Net Income - Preferred Dividends/shares outstanding
54 m Capital Structure: 60 million shares outstanding on Jan 1st. Issuance of Shares Mar 1: 12 m sold Stock Dividend June 17: 10% Shares Reacquired Oct. 1st: 8 m Preffered Stock Dividends: 5 m 8%, $10 par Tax Rate: %40 What is Basic EPS now that there are shares reacquired?
Net Income - Preferred Dividends / Shares Outstanding (1.10) + New Shares Issued x Fraction (1.10) - Treasury Shares Reacquired 154 - 4* / 60(1.1.0) + 12(10/12)(1.10) - 8(3/12) = 150 / 75 = $2.00 * .08 x $10 par x 5 m shares = 4
Preferred dividends reduce earnings available to common shareholders unless the preferred stock is noncumulative and no dividends were declared that year. True or false?
True
Suppose no dividends were declared for the year. Should we adjust for preferred dividends?
Yes, if the preferred stock is cumulative—and most preferred stock is. This means that when dividends are not declared, the unpaid dividends accumulate to be paid in a future year when (if) dividends are subsequently declared. The presumption is that, although the year’s dividend preference isn’t distributed this year, it eventually will be paid.
Net income (after tax) – Preferred dividends* Weighted-average outstanding common stock What is the Weighted-average outstanding common stock?
Number of shares outstanding× Number of months outstanding ÷ 12
A stock dividend or a stock split is a distribution of additional shares to new shareholders
False. A stock dividend or a stock split is a distribution of additional shares to EXISTING shareholders When new shares are sold, both assets and shareholders’ equity are increased. For a stock dividend or split there is merely an increase in the number of shares outstanding.
slide 13 Compute the weighted-average number of shares of common stock outstanding.
100,000(12/13) + [50,000 × (9/12 outstanding)] + [10,000 × (3/12)] = 140,000
Slide 16 Compute the weighted-average number of shares of common stock outstanding.
100,000 × (2.00) + [50,000 × (9/12) × 2.00] = 275,000 ***(100% is 2.00)
If we issue shares during the period, in the form of a stock dividend or stock split, we treat those shares retroactively (to everything in the year that took place before) for the portion of the year that the original shares were outstanding. If the stock split had been issued prior to the current year, it is also treated retroactively. True or false?
False: If the stock split had been issued prior to the current year, we would adjust the weighted-average common shares outstanding, as if the split had taken place at the beginning of the year.
slide 20 Compute the weighted-average number of shares of common stock outstanding.
100,000 + [50,000 × (9/12)] [12,000 × (8/12)] = 129,500
Earnings available to common shareholders are always net income less Current period’s cumulative preferred stock dividends
True. Slide 22.
