Chapter 16 Homework Day 2

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Chapter 16Homework Day 2
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E 16-18 Simple EPS
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1-1-08 Lennon Industries had the following stock
outstanding 6, cumulative, p/s, 100 par,
issued/out 10,000 sh.. 1,000,000 C/S, 10 par,
issued/out 200,000 sh. 2,000,000
In order to acquire net assets of 3 smaller
companies, Lennon authorized issuance of
additional 160,000 c/s shares Company A
4/1/08..Issued 50,000 sh Company B
7/1/08..Issued 80,000 sh Company C 10/1/08
Issued 30,000 sh
On May 14, 2008 Lennon realized 90,000 (before
tax) insurance gain on expropriation of
investments bought in 94.
On 12/31/08 Lennon recorded NI of 300,000 before
tax and exclusive of the gain
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Instructions Assume 50 tax rate, compute EPS
that should appear on f/s of Lennon at 12/31/08.
Assume expropriation is EXTRAORDINARY.
SIMPLE EPS?
Net income - p/s dividends -----------------------
----------- Weighted Average Shares of C/S
300,000 (given) - (300K .50 tax) 150,000
NI after tax and before E Gain
150,000 (90,000 E Gain - (90,000 x .50 tax))
195,000
after tax amount
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Net income - p/s dividends -----------------------
----------- Weighted Average Shares of C/S
10,000 sh x 100 par x 6 60,000
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Net income - p/s dividends -----------------------
----------- Weighted Average Shares of C/S
195,000
-60,000
.47/sh
285,000
BOTTOM LINE EPS IS
Dates Outstanding Shares Out Fraction/year
Weighted Sh
1/1-4/1 200,000
3/12 50,000
Issue 50K
4/1-7/1 250,000
3/12 62,500
Issue 80K
7/1-10/1 330,000
3/12 82,500
Issue 30K
10/1-12/31 360,000
3/12 90,000
Total Weighted Shares. 285,000
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But the question asked for the proper EPS
disclosure which shows a breakdown
EPS before extraordinary gain but after
tax (150,000 - 60,000)/285,000 .31/sh
EPS for extraordinary gain net of
tax 45,000/285,000 .16/sh
Bottom line EPS .47
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Exercise 16-21
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• 6-1-05 Andre Co. and Agassi Co. MERGED to form
• Lancaster Inc.
• 800,000 shares issued to complete merger.
• April 1, 2007 co. issued an additional 400,000
  sh. of stock for
• cash.
• All 1,200,000 shares outstanding on 12/31/07.

• Lancaster also issued 600,000, 20 yr, 8
  convertible bonds
• at par on 7/1/07.
• Each 1000 bond converts to 40 shares of c/s
  at any interest date. No bonds converted to
  date.

After-tax NI 1,540,000 (tax rate of 40)
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a1. For 2007 What no. of shares should be used
for BASIC EPS?
Jan 1 - Apr 1 800,000 sh x 3/12 200,000
Apr 1- Dec 31 1,200,000 sh x 9/12
900,000
1,100,000 sh
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a2. What no. of shares should be used for
DILUTED EPS?
Begin the same way Jan 1 - Apr 1 800,000 sh x
3/12 200,000
On 4/1 issue 400,000 more c/s shares
Apr 1-Jul 1 1,200,000 x 3/12 300,000
On 7/1 sell 8 convertible bonds
600,000/1000 600 bonds x 40 sh/bond 24,000
shares
This is an application of the "if-converted
method"
Jul 1-Dec 31 1,224,000 x 6/12 612,000
Weighted Average Shares.. 1,112,000 sh
NOT backdated to 1/1 because they were JUST sold
this year
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b. What are the earnings figures to be used for
calculating 1. BASIC EPS
1,540,000 net income after tax (given) There
are no preferred dividends.
b. DILUTED EPS
Do the WHAT IF CONVERTED method regarding the
bonds.
SAVE HOW MUCH BOND INTEREST?
600,000 x .08 48,000 x 1/2 (because they were
issued THIS year mid-way through year).
24,000 interest savings
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b. DILUTED EPS
Save 24,000 interest
WHAT IS THE LOST TAX BENEFIT?
24,000 x .40 9,600
WHAT IS THE NET CHANGE IN NI?
24,000 - 9,600 ------------ 14,400
WHAT IS THE DILUTED NI?
1,540,000 14,400 1,554,400
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BASIC EPS
1,100,000
1,540,000/
1.40/sh
DILUTED EPS
1,112,000
1,554,400/
1.40/sh
WE ONLY NEED TO SHOW BASIC EPS!
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E 16-22
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Simon Corp. issued 10-yr, 5,000,000 par, 7
callable, convertible, subordinated debtenures on
1-2-07

• Bonds have par of 1,000 (annual interest).
• Conversion ratio 141 (now)
• In two years it increases to 181
• Were sold AT 98. (St Line Discount Amtz).
• Effective tax rate 35.
• NI for 07 was 9,500,000
• 2,000,000 shares outstanding during entire year.

A. Prepare schedule to compute both BASIC and
DILUTED EPS.
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A. Prepare schedule to compute both BASIC and
DILUTED EPS.
BASIC EPS Net income - p/s dividends ----------
------------------------- Weighted Average
Shares
2,000,000 shares outstanding entire year
There arent any in part a
9,500,000 (given)
- 0
2,000,000 shares 4.75/sh
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Still part A. DILUTED EPS
WHAT IF bonds were converted?
SAVE ON BOND INTEREST
PLUS DISCOUNT AMTZ
5,000,000 x .07 350,000
.02(5,000,000) 100,000 DISC
100,000/10 yrs 10,000
LOST ON TAX BENEFIT
360,000 x .35 126,000
350K10K360K
NET increase in NI
360,000 - 126,000 234,000
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Still part A. DILUTED EPS
WHAT IF bonds were converted?
Would there be any change in the no. of shares?
5,000,000 of bonds/1000face 5,000 bonds
5,000 x 18 (most conservative) 90,000 new shares
9,500,000 234,000 ----------------------------
-- 2,000,000 90,000 4.66
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Part B What if the security was PREFERRED
STOCK? How would the schedule change?
It would look like this 9,500,000 - 0
(because they wouldnt be taken
then) -------------------------------------------
--------------------------- 2,000,000 90,000
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E 16-24
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• Venzuela Co. NI for 07 is 50,000.
• POTENTIAL DILUTERS
• 1,000 options issued during 06
• Each exercisable for one share at 6.
• None exercised
• 10,000 c/s shares outstanding during 07.
• Avg market price of stock during 07 is 20/sh.

Compute DILUTED EPS
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Compute DILUTED EPS
Use the TREASURY STOCK METHOD to
determine impact of options converting.
Shares of c/s produced upon exercise.. 1,000
Proceeds from sale of stocks on option 1000 x 6
6,000
Treasury shares that COULD be repurchased from
sale proceeds 6000/20 300
Net increase in shares from option exercise 700
DILUTED EPS 50,000/(10,000700) 4.67
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B. Assume same facts except that 1000 options
were issued on OCT 1 07 (rather than in 06).
Avg. mkt. price in last three mo. still 20/sh.
We cant pretend that they were exercised on 1/1.
Have to use 10/1 instead.
This CHANGES the addition to weighted shares
Remember we had 700 additional net shares
x 3/12 (three months)
175 increase in shares
50,000/(10,000175) 4.91/sh