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LO 7 Compute earnings per share in a complex capital structure.

Dirac Enterprises Example (Solution 1). Compute basic & diluted earnings per share for 2007. Calculation of Net Income. LO 7 Compute earnings per share in a complex capital structure. Dirac Enterprises Example (solution 2). (a) Compute basic & diluted earnings per share for 2007.

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LO 7 Compute earnings per share in a complex capital structure.

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  1. Dirac Enterprises Example (Solution 1) Compute basic & diluted earnings per share for 2007. Calculation of Net Income LO 7 Compute earnings per share in a complex capital structure.

  2. Dirac Enterprises Example (solution 2) (a) Compute basic & diluted earnings per share for 2007. When calculating Diluted EPS, begin with Basis EPS. Basic EPS Net income = $2,580 = $1.29 Weighted average shares = 2,000 LO 7 Compute earnings per share in a complex capital structure.

  3. Dirac Enterprises Example (Solution 3) (a) Compute basic & diluted earnings per share for 2007. When calculating Diluted EPS, begin with Basis EPS. Diluted EPS + = $2,580 $4,800 (1 - .40) $5,460 = $.68 2,000 6,000 8,000 + = Basic EPS = 1.29 Effect on EPS = .48 LO 7 Compute earnings per share in a complex capital structure.

  4. Dirac Enterprises SOLUTION (a) (a) Compute basic & diluted earnings per share for 2007.

  5. $4,500 $2.25 Basic EPS = 2,000 Dirac Enterprises Example – Part b (b) Assume bonds were issued on Sept. 1, 2007 . Calculation of Net Income LO 7 Compute earnings per share in a complex capital structure.

  6. Dirac Enterprises Example - b (b) Assume bonds were issued on Sept. 1, 2007 . When calculating Diluted EPS, begin with Basis EPS. Diluted EPS = $4,500 + $1,600 (1 - .40) $5,460 = $1.37 = 2,000 6,000 x 4/12 yr. 4,000 + Basic EPS = 2.25 Effect on EPS = .48 LO 7 Compute earnings per share in a complex capital structure.

  7. Dirac Enterprises Example – Solution b (b) Compute basic & diluted EPS for 2007 if bonds issued 9/1/07

  8. Supporting Computations • Interest Expense • 60 bonds total, $1000 face value = $60,000 outstanding first half of year at 8% * 6/12 = $2,400 interest • 40 bonds second half of year = $40,000 * 8% * ½ = $1,600 interest for total of $4,000 interest for year • Therefore, net income = $3,060

  9. Supporting Computations • 60 bonds * 100 = 6,000 shares if converted * ½ year = 3,000 shares • 40 bonds * 100 = 4,000 shares if converted * ½ year = 2,000 shares • Weighted average shares related to convertible bonds = 5,000 shares

  10. Dirac Enterprises Example – Solution c (c) Compute basic & diluted EPS for 2007 if bonds issued 1/1/07 and 20 were converted on 7/1/07.

  11. Dancer Co. Example (similar to P16-7) (a) Compute basic earnings per share for 2007. When calculating Diluted EPS, begin with Basic EPS. Basic EPS Net income $1,500,000 – Pfd. Div. $180,000* = $2.20 Weighted average shares = 600,000 * 30,000 shares x $100 par x 6% = $180,000 dividend LO 7 Compute earnings per share in a complex capital structure.

  12. Dancer Co. Example (similar to P16-7) (b) Compute diluted earnings per share for 2007. When calculating Diluted EPS, begin with Basic EPS. Diluted EPS + $180,000 = $1,500,000 – $180,000 $1,500,000 = + = 150,000* 750,000 600,000 $2.00 Effect on EPS = 1.20 Basic EPS = 2.20 *(30,000 x 5) LO 7 Compute earnings per share in a complex capital structure.

  13. Dancer Co. Example – (c) VARIATION (c) Compute diluted earnings per share for 2007 assuming each share of preferred is convertible into 2 shares of common stock. Diluted EPS + = $1,500,000 – $180,000 $180,000 $1,500,000 = + = 60,000* 660,000 600,000 $2.27 Effect on EPS = 3.00 Basic EPS = 2.20 *(30,000 x 3) LO 7 Compute earnings per share in a complex capital structure.

  14. Dancer Co. Example – (c) SOLUTION (c) Compute diluted earnings per share for 2007 assuming each share of preferred is convertible into2 shares of common stock. *(30,000 x 3) Diluted EPS Basic = Diluted EPS + = $1,500,000 – $180,000 $180,000 $1,320,000 = + = 60,000* 600,000 600,000 Antidilutive $2.20 Effect on EPS = 3.00 Basic EPS = 2.20

  15. Short-cut formula: $20 - $6 = 700 1,000 shares optioned * $20 Venzuela Co. Example (Stock Options) (a) Compute basic and diluted EPS for 2007. Treasury-Stock Method ÷

  16. Basic EPS $50,000 $50,000 = = $5.00 10,000 10,000 Diluted EPS = $50,000 $50,000 = $4.67 + = 10,000 700 10,700 Basic EPS = 5.00 Options Venzuela Co. (a) Stock Options

  17. Venzuela Co. Example (Stock Options) (b) Compute diluted earnings per share assuming the 1,000 options were issued on October 1, 2007. Treasury-Stock Method ÷ x

  18. Venzuela Co. Example (Stock Options) (b) Compute diluted earnings per share assuming the 1,000 options were issued on October 1, 2007. Diluted EPS $50,000 $50,000 = = $4.91 + 10,000 175 10,175 Basic EPS = 5.00 Options

  19. Wilke Corp Example Weighted-Average Number of Shares

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