correct
this was tricky since the forumula that I have in my books says that the denominator is weighted average common shares + shares resulted from convertible debt but does not specify if weighted as well I guess it makes sense when you think of it the warrants stuff was clear to me
How is it A? Basic EPS = 1.5 Bonds are dilutive – 10,000*6%*100/(10,000*20)=0.3 which is less than 1.5 . Warrants are anti-dilutive since exercise price > avg price So total common shares = 1,000,000 + 10,000*20=1,200,000 . Please correct me if I am wrong. > > Based on the following data, how many shares of > > common stock should be used to calculate > diluted > > earnings per share? > > > > Net income of $1,500,000, tax retention rate of > > 60% > > 1,000,000 shares of common are outstanding at > the > > beginning of the year. > > 10,000, 6% convertible bonds with each bond > > convertible into 20 shares of common stock were > > issued at par ($100) on June 30th of this year. > > > The firm has 100,000 warrants outstanding all > year > > with an exercise price of $25 per share. > > The average stock price for the period is $20, > and > > the ending stock price is $30. > > > > A) 1,100,000. > > > > B) 1,200,000. > > > > C) 1,000,000. > > > > D) 1,016,667. > > —answer should be A?
goel_ar Wrote: ------------------------------------------------------- > How is it A? > Basic EPS = 1.5 > Bonds are dilutive – > 10,000*6%*100/(10,000*20)=0.3 which is less than > 1.5 . > Warrants are anti-dilutive since exercise price > > avg price > > So total common shares = 1,000,000 + > 10,000*20=1,200,000 . > > Please correct me if I am wrong. > —the bonds were only outstanding for 1/2 of the yr > > > Based on the following data, how many shares > of > > > common stock should be used to calculate > > diluted > > > earnings per share? > > > > > > Net income of $1,500,000, tax retention rate > of > > > 60% > > > 1,000,000 shares of common are outstanding at > > the > > > beginning of the year. > > > 10,000, 6% convertible bonds with each bond > > > convertible into 20 shares of common stock > were > > > issued at par ($100) on June 30th of this > year. > > > > > The firm has 100,000 warrants outstanding all > > year > > > with an exercise price of $25 per share. > > > The average stock price for the period is > $20, > > and > > > the ending stock price is $30. > > > > > > A) 1,100,000. > > > > > > B) 1,200,000. > > > > > > C) 1,000,000. > > > > > > D) 1,016,667. > > > > —answer should be A?
good problems, lola!
liaaba Wrote: > assuming these questions were from schweser, for > this one, if you use the yr end figure rather than > the avg equity, then you’ll get 0.576, they > probably assumed you’ll use the extended version > and use the year end figures instead, typical > schweser quality… You are right, liaaba. They used year end number, but that doesn’t make sense to me. Which extended version are you talking about? Do you mean DuPont model? Why would it matter? It seems like regardless of the method, average equity should be used.
maratikus Wrote: ------------------------------------------------------- > liaaba Wrote: > > assuming these questions were from schweser, > for > > this one, if you use the yr end figure rather > than > > the avg equity, then you’ll get 0.576, they > > probably assumed you’ll use the extended > version > > and use the year end figures instead, typical > > schweser quality… > > You are right, liaaba. They used year end number, > but that doesn’t make sense to me. Which > extended version are you talking about? Do you > mean DuPont model? Why would it matter? It seems > like regardless of the method, average equity > should be used. —if you read the stuff on DuPont again, they mentioned the use of year end figures instead of avgs in order to maintain the identity in the DuPont equation… I think this point is not that important personally, if you see a question like this, just do both, whichever they have in the solution, that’s the one you circle…don’t let minor details like this consume you…
liaaba Wrote: ------------------------------------------------------- […] > I think this point is not that important > personally, if you see a question like this, just > do both, whichever they have in the solution, > that’s the one you circle… the prob is when they have both 
lola Wrote: ------------------------------------------------------- > liaaba Wrote: > -------------------------------------------------- > ----- > […] > > I think this point is not that important > > personally, if you see a question like this, > just > > do both, whichever they have in the solution, > > that’s the one you circle… > > the prob is when they have both —when they have both, then they’re probably looking for the avg one… but I think this problem will only occur w/ schweser…
Thanks for the questions guys! Kept me busy through the afternoon at work. Here’s another EPS question. No choices this time. Venzuela Company’s net income for 2001 is $50,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2000, each exercisable for one share at $6. None has been exercised, and 10,000 shares of common were outstanding during 2001. The average market price of Venzuela’s stock during 2001 was $20. (a) Compute diluted earnings per share. (b) Assume the same facts as those assumed for Part (a), except that the 1,000 options were issued on October 1, 2001 (rather than in 2000). The average market price during the last three months of 2001 was $20.
Additional stocks because of options = 1,000-$6,000/$20 = 700 EPS = 50,000/10700 = 4.67 if october, additional stocks = 700/4 = 175 EPS = 50,000/(10,175)=4.91
good job maratikus!
Quick question…I got this wrong on the qbank. I thought warrants only affects the denomenator in a diluted EPS. could someone explain this? All of the following securities may affect the numerator in the diluted EPS equation EXCEPT: A) convertible bonds. B) options. C) restricted warrants. D) convertible preferred stock. Your answer: C was incorrect. The correct answer was B) options.
A couple postings up is a options example…
what are restricted warrants?
Restricted warrants can only be exercised if there is enough authorized stock available to cover the stock purchase rights of these warrants
thanks, kevin002!
I still don’t understand how restricted warrant affects the numerator of a diluted EPS. Could someone be kind to explain?
I think I’m having a brain freeze. Could some one suggest a scenario of when an option affects the numerator…
Answer was Options does not affect the Numerator… (B) was the correct choice.