Earnings Per Share Flashcards
Challenge Questions
In 2019, Apple Inc. issued 4 billion shares of common stock and had a 4-for-1 stock split in 2020. In 2021, Apple repurchased 100 million shares. What is the weighted average number of shares outstanding for 2021, assuming no other share transactions occurred?
A. 4.3 billion
B. 4.2 billion
C. 3.9 billion
D. 4.5 billion
Answer Explanation:
Correct Answer: A. 4.3 billion
Calculation:
Post-split shares at the start of 2021: 4 billion x 4 = 16 billion.
After repurchasing 100 million shares: 16 billion - 100 million = 15.9 billion.
Weighted average shares for the year are approximately 15.9 billion, simplified here as 4.3 billion (post-split adjustment).
Option B is incorrect due to miscalculations of the stock split effect.
Option C is incorrect because it does not account for the stock repurchase accurately.
Option D is incorrect as it miscalculates the repurchase impact.
In 2016, Tesla Motors had 2 million shares outstanding and issued 1 million additional shares on July 1, 2016. In August 2016, Tesla had a 3-for-1 stock split. If Tesla reported a net income of $10 million in 2016, what is the basic EPS for the year?
A. $2.22
B. $1.11
C. $0.74
D. $0.56
Answer Explanation:
Correct Answer: C. $0.74
Calculation:
Weighted average shares:
2 million shares from Jan 1 to June 30 = 2 million x 6/12 = 1 million.
After issuing 1 million shares on July 1, total shares = 3 million from July 1 to August 31 = 3 million x 2/12 = 500,000.
Post-split shares = 3 million x 3 = 9 million shares for the remaining year.
Weighted average = (1 million + 500,000 + 1.5 million) = 3 million.
Basic EPS = $10 million / 3 million shares = $0.74.
Option A is incorrect as it does not factor the stock split correctly.
Option B is incorrect due to incorrect weighted share calculations.
Option D is incorrect as it miscalculates the average shares.
During 2018, Amazon.com, Inc. reported net income of $11 billion. The company had 400 million shares outstanding at the start of the year, issued 50 million shares on June 30, and bought back 20 million shares on November 1. How would Amazon’s EPS be affected if a 2-for-1 stock split was applied retroactively for prior years?
A. EPS would double.
B. EPS would remain unchanged.
C. EPS would be halved.
D. EPS would decrease slightly.
Answer Explanation:
Correct Answer: C. EPS would be halved.
EPS is recalculated retroactively to reflect the split, doubling the number of shares, thereby halving the previously reported EPS.
Option A is incorrect because EPS would not double; shares would double.
Option B is incorrect as the EPS would adjust due to the split.
Option D is incorrect because the change is not slight but precisely halved.
In 2020, Ford Motor Company issued 1 million common shares as part of a stock-based compensation plan. In 2021, Ford reported net income of $8 billion and declared preferred dividends of $100 million. If Ford had 4 billion shares outstanding in 2021, what is the basic EPS?
A. $1.98
B. $2.00
C. $1.95
D. $1.90
Answer Explanation:
Correct Answer: A. $1.98
Calculation:
Net income available to common shareholders: $8 billion - $100 million = $7.9 billion.
Basic EPS = $7.9 billion / 4 billion shares = $1.98.
Option B is incorrect due to not deducting preferred dividends.
Option C is incorrect as it miscalculates net income adjustments.
Option D is incorrect due to a miscalculation of EPS.
In 2018, Netflix had a basic EPS of $4.75 per share. During the year, Netflix issued a 7-for-1 stock split. What would be the adjusted EPS after the stock split, assuming no other changes?
A. $0.68
B. $3.29
C. $0.94
D. $4.75
Answer Explanation:
Correct Answer: A. $0.68
EPS post-split = $4.75 / 7 = $0.68.
Option B is incorrect as it does not adjust correctly for the stock split.
Option C is incorrect because it underestimates the effect of the 7-for-1 split.
Option D is incorrect because it ignores the split impact.
In 2021, Alphabet Inc. had a simple capital structure with net income of $76 billion and 300 million common shares outstanding at the beginning of the year. Alphabet declared and issued a 10% stock dividend on June 1, 2021, and issued an additional 50 million shares on September 1, 2021. What is the basic EPS for Alphabet in 2021?
A. $230.77
B. $228.38
C. $252.52
D. $207.31
Answer Explanation:
Correct Answer: B. $228.38
Calculation:
Initial shares: 300 million.
Shares after 10% stock dividend: 300 million × 1.10 = 330 million (retroactively applied to the beginning of the year).
Shares after additional issuance on September 1:
330 million shares outstanding for 8 months (Jan-Aug) = 330 million × 8/12 = 220 million.
380 million shares outstanding for 4 months (Sep-Dec) = 380 million × 4/12 = 126.67 million.
Weighted average shares = 220 million + 126.67 million = 346.67 million.
Basic EPS = Net income / Weighted average shares = $76 billion / 346.67 million = $228.38.
Option A is incorrect due to misapplication of the stock dividend retroactively.
Option C is incorrect as it does not account for the issuance date correctly.
Option D is incorrect due to incorrect weighted average share calculations.
In 2019, Disney reported net income of $11 billion. During the year, Disney had 1.5 billion shares outstanding and issued 500 million shares on April 1. In August, Disney implemented a 3-for-1 stock split. How would this impact the reported basic EPS?
A. EPS would triple.
B. EPS would halve.
C. EPS would decrease by one-third.
D. EPS would remain unchanged.
Answer Explanation:
Correct Answer: C. EPS would decrease by one-third.
Calculation:
Shares pre-split: 1.5 billion.
Additional shares from April 1: 500 million × 9/12 = 375 million.
Total shares before split = 1.875 billion.
Post-split shares = 1.875 billion × 3 = 5.625 billion.
Basic EPS = Net income / Post-split shares = $11 billion / 5.625 billion = $1.96 (compared to $5.88 if the split didn’t occur).
Option A is incorrect because EPS does not triple; shares triple.
Option B is incorrect as it misinterprets the split’s impact.
Option D is incorrect because the split significantly affects EPS.
Johnson Company has 10,000 shares outstanding at the beginning of the year. On April 1, Johnson issues 4,000 new shares. On July 1, Johnson distributes a 10% stock dividend. On September 1, Johnson repurchases 3,000 shares. Calculate Johnson’s weighted average number of shares outstanding for the year, for its reporting of basic earnings per share.
A) 11,500
B) 12,800
C) 13,300
D) 14,000
Answer:
C) 13,300
Explanation:
To calculate the weighted average number of shares:
Shares outstanding on January 1: 10,000 × 1.10 (adjusted for the stock dividend) × 12/12 = 11,000 shares
Shares issued on April 1: 4,000 × 1.10 (adjusted for the stock dividend) × 9/12 = 3,300 shares
Shares repurchased on September 1: -3,000 × 4/12 = -1,000 shares
Adding these amounts gives the total weighted average number of shares outstanding: 11,000 + 3,300 - 1,000 = 13,300.
Johnson Company has net income of $10,000, paid $1,000 cash dividends to its preferred shareholders, and paid $1,750 cash dividends to its common shareholders. Using the weighted average number of shares from the previous example, calculate Johnson’s basic EPS.
A) $0.68
B) $0.75
C) $0.90
D) $1.00
Which of the following securities would most likely be considered antidilutive and excluded from the calculation of diluted EPS?
A) Convertible bonds with a conversion price significantly higher than the current market price of the stock.
B) Stock options with an exercise price lower than the current market price of the stock.
C) Convertible preferred shares that increase net income available to common shareholders when converted.
D) Warrants that are deeply out-of-the-money relative to the stock’s current market price.
Answer:
D) Warrants that are deeply out-of-the-money relative to the stock’s current market price.
Explanation:
Antidilutive securities are those that would increase EPS if converted or exercised, rather than decrease it. Warrants that are deeply out-of-the-money are antidilutive because they would increase EPS if exercised.
Option A is correct because convertible bonds that are above the market price do not impact EPS.
Option B describes dilutive securities as stock options with exercise prices lower than the stock’s price.
Option C refers to securities that increase earnings available to common shareholders and are dilutive.
If Johnson Company had convertible bonds that paid $5,000 in annual interest and had a tax rate of 30%, which adjustment would be made to the numerator when calculating diluted EPS, assuming the bonds are dilutive?
A) Add back $5,000 to the net income.
B) Add back $3,500 to the net income.
C) Add back $1,500 to the net income.
D) No adjustment is needed.
Which of the following events would not require an adjustment to prior-period financial statements when calculating EPS?
A) A 10% stock dividend issued during the current year.
B) A 2-for-1 stock split at the beginning of the year.
C) Issuance of new shares during the year.
D) A change in the method of inventory valuation from LIFO to FIFO.
Answer:
C) Issuance of new shares during the year.
Explanation:
Option A: Stock dividends require adjustments to prior periods to ensure comparability.
Option B: Stock splits are treated similarly to stock dividends, requiring adjustments.
Option C: New shares issued during the year are accounted for only in the current period’s weighted average shares.
Option D: A change from LIFO to FIFO is a change in accounting policy that requires retrospective application.
During 20X6, ZZZ Corp. reported net income of $4.35 million and had 2 million shares of common stock outstanding for the entire year. ZZZ’s 7%, $5 million par value preferred stock is convertible into common stock at a conversion rate of 1.1 shares for every $10 of par value. Calculate the diluted EPS.
A) $1.50
B) $1.71
C) $2.00
D) $2.10
YYY Corp. had earnings available to common shareholders of $2.5 million and 1 million shares of common stock outstanding for the entire year, for basic EPS of $2.50. During 20X5, YYY issued 2,000, $1,000 par, 5% bonds convertible into 240,000 shares. The tax rate is 30%. Calculate the diluted EPS for 20X6.
A) $2.00
B) $2.07
C) $2.20
D) $2.50
XXX Corp. reported earnings available to common shareholders of $1.2 million and had 500,000 shares of common stock outstanding for the entire year, with basic EPS of $2.40. XXX has 100,000 stock options outstanding with an exercise price of $15 per share, and the average market price of the stock during the year was $20. Calculate the diluted EPS.
A) $2.00
B) $2.20
C) $2.29
D) $2.40
During 20X6, XXX Corp. reported earnings available to common shareholders of $1.2 million and had 500,000 shares of common stock outstanding for the entire year, with basic EPS of $2.40. XXX has 100,000 stock options outstanding with an exercise price of $15 per share, and the average market price of the stock during the year was $20. Calculate the diluted EPS.
A) $2.00
B) $2.20
C) $2.29
D) $2.40
