SS #8 Review

Here’s an easy one to get the ball rolling: ----------------- Selected information from Baltimore Corp’s financial activities in the year 2004 is as follows: Net income was $4,200,000 . 750,000 shares of common stock were outstanding on January 1. The average market price per share was $50 in 2004. Dividends were paid in 2004. 10,000 warrants, which allowed the holder to purchase 10 shares of common stock for each warrant held at a price of $40 per common share, were outstanding the entire year. Baltimore’s diluted earnings per share (Diluted EPS) for 2004 is closest to: A) $5.45. B) $5.60. C) $4.94. D) $4.83.

Since the exercise price of the warrants are less than the average market price during the year, the warrants are dilutive. We would use the treasury stock method to calculate the adjustment. (avg mkt price - exercise price / avg mkt price) x # of shares the warrant can be converted into… [(50-40)/50] x 100,000 = 20,000 additional shares …so, 4,200,000/770,000 = $5.45, or answer choice A)

Nice work, Mr_Clean.

hey lola, little suggestion, can you use *s for these review postings like the one you did for the previous review thread, it makes it easier to pick these out from the other threads

sure, no prob.

another one: ----------- All else equal, which of the following will help decrease a company’s total debt to equity ratio? A) Lowering the dividend payout ratio. B) Buying treasury stock. C) Paying cash dividends to stockholders. D) Converting long-term debt to short-term debt.

A. Lower dividend payout ratio ==> increasing retained earning ==> Increased Equity==>Low Total Debt/Equity ratio. – Debt remains unchanged. B. Buying Treasury stock will affect only asset of the Balance sheet so Debt/Equity remains same. C. Paying Cash dividends ==> Less Retained earnings ==> Lower equity=> Increased Debt/Equity Ratio. D- Total debt remains same. Equity remains same . So no change. So , I think it is A.


goel i agree with you … A is correct

Your reasoning is correct, goel_ar. The answer is A indeed. Lowering dividend payout ratio will increase retained earnings, thus increasing stockholders’ equity and decreasing debt/equity ratio. A question on the buying treasury stock though, doesn’t that decrease stockholder’s equity, so that will increase the debt/equity ratio?

Buying Treasury stock (unlike what Goel_ar has written above) will reduce equity. Therefore D/E will increase. Question specifically asks for D/E decrease. Hope this makes sense. CP

that’s what I thought. Thanks, cpk123. Glad I’m not going crazy :wink:

How is buying treasury stock going to reduce equity? If E = A - L, buying treasury stock doesn’t change Assets value and Liabilities value - equity shouldn’t change either.

But you would buy Treasury stock with Cash, so cash will go down, thus the assets will go down. Liabilities will not change and Equity will go down.

remember that treasury stock is a contra account.

Thanks, guys. It’s helpful. Stock repurchase is equivalent to paying off dividents.

Hey guys, I get that Equity will go down by purchasing treasury stock…but which part in specific (of Equity) will go down? I’m just basically looking for something to clarify, like purchasing treasury stock brings down your assets, because you’re using cash… Thanks!

what do you mean what part of equity? equity is equity, I think someone already mentioned earlier in this thread that treasury stock is a contra account, so it’s like depreciation, it works to offset the other account, in this case, the common equity equity account

Yea, I see that now…I meant shareholder’s equity before (pref, cs, add. PIC, RE and Treasury Stock) and I forgot that Treasury Stock is a contra account. Thanks for the help!

Use the following data from Delta’s common size financial statement to answer the question: Earnings after taxes = 18% Equity = 40% Current assets = 60% Current liabilities = 30% Sales = $300 Total assets = $1,400 What is Delta’s total-debt-to-equity ratio? A) 1.0. B) 1.5. C) 2.0. D) 2.5.