Intro to Earnings Per Share

Question 1

All firms must report BEPS and DEPS: True or False?

Answer 1

False

Question 2

Only the amount of dividends in arrears should be subtracted in computing EPS for noncumulative preferred stock: True or False?

Answer 2

False

Question 3

A firm has the following amounts reported in its current financial statements:

Income from continuing operations
Net income
Discontinued operations
If the firm has no potentially dilutive securities, 5 amounts must be shown on a per-share basis. True or False?

Answer 3

False

Question 4

Only income amounts on a per-share basis are reduced by preferred stock dividends.
True
False

Answer 4

True

Question 5

When dividends are declared and paid on preferred stock, the effect on EPS is that diluted EPS is reduced but not basic EPS.
True
False

Answer 5

False

Question 6

When dividends in arrears are declared, they are subtracted in the numerator of BEPS in the year paid.
True
False

Answer 6

False

Question 7

A complex capital structure implies the presence of securities that can become capital stock in the future.
True
False

Answer 7

True

Question 8

When preferred stock dividends are subtracted in the numerator of BEPS, it is the after-tax amount that is subtracted.
True
False

Answer 8

False

Question 9

Wood Co.’s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the income available to common stockholders be calculated?

A. The dividends on the noncumulative preferred stock should be added to the net loss, but the current-year dividends and the dividends in arrears on the cumulative preferred stock should NOT be included in the calculation.
B. The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss.
C. Neither the dividends on the noncumulative preferred stock nor the current-year dividends and the dividends in arrears on cumulative preferred stock should be included in the calculation.

Answer 9

B. The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss.

Question 10

During the current year, Comma Co. had outstanding: 25,000 shares of common stock, 8,000 shares of $20 par, 10% cumulative preferred stock, and 3,000 bonds that are $1,000 par and 9% convertible. The bonds were originally issued at par, and each bond was convertible into 30 shares of common stock. During the year, net income was $200,000, no dividends were declared, and the tax rate was 30%.

What amount was Comma’s basic earnings per share for the current year?

$3.38
$7.36
$7.55

Answer 10

$7.36 One year of preferred stock dividends is subtracted from income in the numerator of EPS because the stock is cumulative. The amount of dividends declared does not affect the calculation. The bonds are not relevant because basic EPS does not assume conversion of the bonds. The calculation is: Basic EPS = [$200,000 - (8,000 × $20 × .10)]/25,000 = ($200,000 − $16,000)/25,000 = $7.36.

Question 11

Jen Co. had 200,000 shares of common stock and 20,000 shares of 10%, $100 par value cumulative preferred stock. No dividends on common stock were declared during the year. Net income was $2,000,000. What was Jen’s basic earnings per share?
$9.00
$9.09
$10.00

Answer 11

$9.00 Earnings per share is: (net income - preferred dividends)/common shares outstanding. Preferred stock dividends are $100 × 10% × 20,000 shares = $200,000. Earnings per share is (2,000,000-200,000)/200,000=$9 per share.