Vol. 3 LM1 Earnings Per Share

Question 1

(Capital Structure)

input into ratios such as the price/earnings ratio

Answer 1

earnings per share (EPS)

Question 2

(Capital Structure)

IFRS and US GAAP both require the presentation of EPS on the face of the income statement for __________ and __________ from continuing operations.

Answer 2

net profit or los (net income) [and];
profit or loss (income)

Question 3

(Capital Structure)
FASB ASC Topic 260 [Title name]

Answer 3

Earnings Per Share

Question 4

(Capital Structure)

EPS is covered where in IAS and ASC respectively?

Answer 4

IAS No. 33;
FASB ASC Topic 260

Question 5

(Capital Structure)

Under IFRS, te type of equity for which EPS is presented is referred to as _________

Answer 5

ordinary

Question 6

(Capital Structure)

____ are those equity sares that are subordinate to all other types of equity.

Answer 6

ordinary shares

Question 7

(Capital Structure)

____ are the equity holders who are paid last in a liquidation of the company and who benefit the most when the company does well.

Answer 7

ordinary shareholders

Question 8

(Capital Structure)

Under US GAAP, ordinary equity is referred to as ____ or ____, reflecting US language usage.

Answer 8

common stock [or] common shares

Question 9

(Capital Structure)

examples of financial instruments that are potentially convertible into common stock

Answer 9

· convertible bonds
· convertible preferred stock
· employee stock options
· warrants

Question 10

(Capital Structure)

complex capital structures affect the calculation of EPS in which ways?

Answer 10

They contain convertible financial instruments, which risk conversion or exercise, potentially diluting or decreasing EPS.

Question 11

Define

Diluted EPS

Answer 11

if all dilutive financial instruments were converted into common stock.

Question 12

Describe

Basic EPS

Answer 12

the amount of income available to common shareholders divided by the weighted average number of common shares outstanding over a period

Question 13

Calculation

Basic EPS

Answer 13

Basic EPS = (Net income - Preferred dividends) /
Weighted average number of shares outstanding

Question 14

Describe

income available to common shareholders

Answer 14

the amount of net income remaining after preferred dividends (if any) have been paid.

Question 15

Company B began the year with 2,000,000 shares.
They repurchased 100,000 shares on July 1.

What is the weighted average number of shares outstanding for use in basic EPS calculation?

Answer 15

[Note July 1 is exactly halfway through the year]
2,000,000 x 0.5 + (1,900,000 x 0.5) = 1,950,000 shares.

July 1 = (2,000,000 - 100,000) = 1,900,000

Question 16

FYE 2018, Shopalot had net income of $1,950,000. The company had 1,500,000 shares of common stock outstanding, no preferred stock, and no convertible financial instruments.

What is Shopalot’s basic EPS?

Answer 16

$1,950,000 / 1,500,000 shares = $1.30

Question 17

FYE 2018 Dec 31, $2,500,000 net income.
Company paid $200,000 of dividends on preferred stock.
Jan 1: 1,000,000 shares outstanding
Apr 1: 200,000 shares issued
Oct 1: 100,000 repurchased (treasury shares)

What is the weighted average number of shares outstanding?

Answer 17

Jan 1: 1,000,000 shares
Apr 1: 1,200,000 shares
Oct 1: 1,100,000 shares

1,000,000 x (3/12) = 250,000
1,200,000 x (6/12) = 600,000
1,100,000 x (3/12) = 275,000
= 1,125,000

Question 18

FYE 2018 Dec 31, $2,500,000 net income.
Company paid $200,000 of dividends on preferred stock.
Jan 1: 1,000,000 shares outstanding
Apr 1: 200,000 shares issued
Oct 1: 100,000 repurchased (treasury shares)

What is the company’s basic EPS?

Answer 18

[($2,500,000-$200,000) /
(1,000,000x(3/12)+1,200,000x(6/12)+1,100,000x(3/12))]

=$1.02 EPS

Question 19

Describe

if-converted method

Answer 19

based on what EPS would ave been if the convertible preferred securities had been converted at the beginning of the period

Question 20

FYE 18, a utility company had net income $1,750,000.
Average of 500,000 shares of common stock,
20,000 shares of convertible preferred, at 5 shares per,
no other potentially dilutive securities;

What is the if-converted diluted EPS?

Answer 20

$1,750,000 - $0 (preferred dividend)

500,000 is the stated weighted average number of shares outstanding +
20,000 x 5 = 100,000

$1,750,000 / 600,000 = $2.92

Question 21

Calculate

Diluted EPS with convertible debt outstanding

Answer 21

(Net income + after-tax interest on convertible debt - preferred dividends) /
(weighted average number of shares outstanding + additional common shares that would have been issued at conversion)

Question 22

Define

Diluted EPS Treasury Stock Method

Answer 22

When a company has stock options, warrants, or their equivalents outstanding, diluted EPS is calculated as if the financial instruments had been exercised and the proceeds from exercise had been used to repurchase as many shares of stock as possible

Question 23

Calculate

Diluted EPS Treasury Stock Method

Answer 23

Question 24

Company has net income of $2,300,000 FYE June 30;
Company has weighted average shares outstanding 800,000 common stock;
30,000 options wit an exercise price of $35.
No other dilutive financial instruments;
market price of stock averaged $55.00

Calculate basic and diluted EPS using treasury stock method

Answer 24

Option exercise: 30,000 x $35 = $1,050,000;
30,000 options -> 30,000 shares would be outstanding;
$1,050,000 / $55 = 19,091 shares repurchased;

Diluted: $2,300,000 / (800,000+10,909) = $2.84
Basic: $2,300,000 / 800,000 = $2.88

Question 25

Under US GAAP, what securities are not included in diluted EPS calculation?

Answer 25

antidilutive securities

Question 26

A utility company has net income $1,750,000;
weighted average shares outstanding;
20,000 shares convertible preferred at $10 into 3 shares

Calculate diluted EPS using if-converted method

Answer 26

$1,750,000
- 0 (preferred dividend)
divided by
500,000 weighted average number of shares
60,000 if converted (20,000 x 3 shares per)

diluted EPS = $3.13

Question 27

When a company has convertible preferred stock outstanding, diluted EPS is calculated using

Answer 27

if-converted method

Question 28

For the year ended 31 December 2018, Bright-Warm Utility Company
(fictitious) had net income of $1,750,000.
The company had an average of 500,000 shares of common stock outstanding, 20,000 shares of convertible preferred, and no other potentially dilutive securities.
Each share of preferred pays a dividend of $10 per share, and each is convertible into five shares of the company’s common stock.

Calculate the company’s basic and diluted EPS.

Answer 28