Transcript Chapter 16 Homework Day 2

Chapter 16
Homework Day 2
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
Instructions:
Assume 50% tax rate, compute EPS that should appear on
f/s of Lennon at 12/31/08. Assume expropriation is
EXTRAORDINARY.
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
Net income - p/s dividends
---------------------------------Weighted Average Shares of C/S
10,000 sh x $100 par x 6%= $60,000
Net
income - p/s-$60,000
dividends
$195,000
---------------------------------285,000
Weighted
Average Shares of C/S
= $.47/sh
BOTTOM LINE EPS IS:
Dates Outstanding
1/1-4/1 Issue 50K
4/1-7/1
Issue 80K
7/1-10/1
Issue 30K
10/1-12/31
Shares Out
Fraction/year Weighted Sh
200,000
3/12
50,000
250,000
3/12
62,500
330,000
3/12
82,500
360,000
3/12
90,000
Total Weighted Shares………………………………. 285,000
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
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%)
a1. For 2007
What no. of shares should be used for BASIC EPS?
Jan 1 - Apr 1
Apr 1- Dec 31
800,000 sh x 3/12 = 200,000
1,200,000 sh x 9/12 = 900,000
1,100,000 sh
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
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
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
$1,540,000/ $1,100,000
= $1.40/sh
$1,554,400/
1,112,000
= $1.40/sh
WE ONLY NEED TO SHOW BASIC EPS!
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 14:1 (now)
• In two years it increases to 18:1
• 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.
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 aren’t any in part a
$9,500,000 (given) - 0
2,000,000 shares
=
$4.75/sh
Still part A. DILUTED EPS
WHAT IF bonds were converted?
SAVE ON BOND INTEREST
$5,000,000 x .07 = $350,000
LOST ON TAX BENEFIT
PLUS DISCOUNT AMTZ
.02(5,000,000) = $100,000 DISC
$100,000/10 yrs = $10,000
$360,000 x .35 = $126,000
NET
increase $360,000 - $126,000 =$234,000
in NI
$350K+10K=$360K
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
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 wouldn’t be taken then)
---------------------------------------------------------------------2,000,000 + 90,000
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
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/(10,000+700)
=$4.67
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 can’t 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)
$50,000/(10,000+175) =
175 increase in shares
$4.91/sh