Lesson 31

Question 1

what does earnings per share measure?

Answer 1

it measures profitability relative to ownership of that company

Question 2

EPS measures the amount of money I can make from the shares the company has outstanding

Question 3

What are the two measures of EPS

Answer 3

Basic EPS (BEPS)
Diluted EPS (DEPS)

Question 4

How to compute basic EPS

Answer 4

Net income - preferred stock dividends / weighted average shares of common outstanding

Question 5

DEPS assumed what as part of its calculation

Answer 5

conversion of potential common stock (PCS)

Question 6

What are potential common stock (PCS)

Answer 6

stock options and other securities that could become common stock in the future

Question 7

When is there a diluted effect of PCS?

Answer 7

when DEPS is less than BEPS

Question 8

Common stock dividends have no effect on EPS. True or False

Answer 8

True

Question 9

Diluted EPS formula

Answer 9

(Net income - PS dividends +/- adjust to NI for assumed conversion of PCS) / (Weighted average shares of CS outstanding + shares from assumed conversion of PCS)

Question 10

How to calculate preferred dividend from: 1,000 shares of 4%, $100 par?

Answer 10

1,000($100)(.04) = $4,000

Question 11

At December 31, 2017, Twin Rivers Company had 450,000 shares of common stock issued and outstanding, 350,000 of which had been issued and outstanding throughout the year and 100,000 of which were issued on September 1, 2017. Net income for the year ended December 31, 2017, was $1,160,000.

What should be Twin Rivers’ 2017 earnings per common share, rounded to the nearest penny?

Answer 11

$3.02
Correct. Earnings per share is calculated as: [(Net Income - Preferred Dividends)/Weighted-Average Common Shares Outstanding]. 350,000 x 12/12 + 100,000 x 4/12 = 383,333. The correct answer is: $1,160,000/383,333 = 3.02

Question 12

Pesca Company had 820,000 shares of common stock outstanding on January 1, issued 360,000 shares on April 1 and purchased 24,000 shares of treasury stock on December 1.

What is the weighted average shares outstanding for the year?

Answer 12

1,088,000 shares
Correct. To calculate the weighted-average number of shares outstanding, companies must weight the shares by the fraction of the period they are outstanding. Pesca’s weighted-average of number of shares outstanding is calculated as: (a) 820,000 shares x 3/12 of the year = 205,000 shares (b) 820,000 shares + 360,000 issued shares = 1,180,000 shares x 8/12 of the year = 786,667 shares (c) 1,180,000 shares - 24,000 shares purchased as treasury stock = 1,156,000 shares x 1/12 of the year = 96,333 shares 205,000 shares + 786,667 shares + 96,333 shares = 1,088,000 shares