I know that Basic EPS = (Net Income - Preferred Dividend) / Wtd. Avg. No. of Common Shares O/S
However, I’m not getting the correct answer in the below problem and am struggling to figure out what’s wrong.
XYZ reported the following equity accounts on December 31 of this year: Bonds payable, 12 percent, nonconvertible $200 Preferred shares, $15 par, 7 percent, non convertible, non cumulative $300 Common shares, no par, 40 shares outstanding $400 Retained earnings $120 Additional Information: (1) The Board of Directors declared a 10 percent stock dividend on all classes of shares on April 1, and issued these shares on August 1. (2) Income for the period was $88. (3) There were no share transactions during the year, other than the stock dividend. The basic earnings per share amount is: A) $1.52 B) $1.68 C) $2.00 D) $2.20 E) There would not be a basic earnings per share figure for XYZ this year. So it should be (88-21)/40 = 1.68 (but the answer is C)
Regarding WACSO, the question lists 40 as the amount of common shares at year end , so shouldn’t it be inclusive of the stock dividend declared way back in April?
Not sure, really. I have a similar problem with another EPS question, wonder how they’re making the calculations:
LASTEPS Co. had granted 20,000 options to buy one common share at $10 per share several years ago. The company earned $200,000 this year and had 300,000 common shares outstanding the entire year. The company earns interest at 8% and has a 40% tax rate. Given only the above information, what are basic EPS and diluted EPS respectively that should be reported?
A) .67, .66
B) .65, .63
C) .63, .62 D) .65, .64 E) Only basic EPS need be reported The answer is D. But Basic EPS should be 200,000/300,000 and that’s not 0.65.
In some sample test papers. Do you think my previous calculation is correct? Maybe I’m doing something wrong. Does “The company earned $200,000 this year” mean after or before tax?
