Earnings Per Share (16.04) Earnings Per Share: Class Questions
- Review 1 All right, let's do some questions in earnings
per share.
Question number one, last sentence first.
What amount should Straco report as basic earnings per share in its X3 and X2 comparative
income statements?
All right, so that's basic earnings per share.
Let's see what we got.
Straco has one class of common stock outstanding and no other securities that are potentially
convertible in the common stock.
They have nothing convertible, that means no options, rights, warrants, no convertible
bonds, convertible preferred.
During X2, a 100,000 shares of common stock were outstanding.
In X3, two distributions of additional common shares occurred.
On April first, April fools.
20,000 shares of treasury stock were sold and on July, a two for one split was issued.
What do you know about a two for one split?
How do you treat splits?
Retroactively.
Good, and it hits what?
This year and any other years as well.
Net income was 4.10 in X3 and 3.50 in X2.
What amount should Straco report as basic earnings per share for X3 and X2 comparative
income statements.
All right, so let's clean this up right here and see what's going on.
We need to figure out the weighted average number of stock outstanding.
That's what's happening here.
Let's move that down, there we go.
All right, so we've got X2 and X3.
Let's use this color.
X2, boom, X3, boom.
All right, we have net income for X2 was 3.50.
Net income for X3 was four something, what was it?
4.10.
Okay, it said we had a 100,000 shares outstanding here so that's 3.50.
Here it said we have to figure it out.
It says we had 100,000 shares outstanding for the whole year.
That's 12/12 then on April first we issued 20,000 shares.
That means we have 20,000 shares April.
That's January, February, March.
That means they're outstanding for 9/12 of the year.
That's a 100 plus nine 12, this is three quarters is 15.
Then we had a two for one stock split, two for one.
That means we've got 1.15 and a two for one means we're going to double it times two is
2.30.
We have 2.30 weighted average, 2.30.
4.10 over 2.30 gives me something like a $1.78.
Okay now, let me back up.
How did I get weighted average?
A 100 for the whole year 12/12.
We have 20,000 for three quarters of the year which would be from April first to the end
of the year.
That's 15, that's 1.15.
Two for one split retroactively goes back and hits everything that preceded it.
1.15 times two is 2.30.
Boom, boom, good.
Okay, so that means 3.50 over 100 is $3.50.
Was there a choice 3.50, 1.78?
Yeah. 3.50, 1.78 is answer A which is attaboy but it's wrong, thanks for coming out.
What did we do wrong?
Well they only had 100,000 outstanding but remember this two for one split.
It is retroactive split so you've got to go times two is 200, that cuts this in half to
$1.75.
Notice that looks a lot better.
Do you see why?
Otherwise we would compare 3.50 and 1.78 and go oh my gosh, last year earnings per share
were 3.50.
This year they dropped to 1.78, sell, sell, sell but in reality for comparative purposes,
no.
It's got to be apples to apples, 1.75 to 1.78.
You go, "They went up."
Buy, buy, buy.
You can see that it's very important to make the right distinction.
The correct answer is B, 1.78 and 1.75.
Good question.
Question number two, last sentence first.
What amount should Westco report as diluted earnings per share, diluted?
Westco had earnings per share of $15 for X3 before considering the effects of any convertible
securities.
Again, keyword before.
Sometimes it will say including, so you got to read it carefully.
No conversion or exercise of convertible securities occurred during the year.
Now, does it matter?
Not really because for diluted, what have we learned?
Diluted says anyone who could convert does so even if they don't, they could at the earliest
point possible.
However, possible conversion of convertible bond's not considered common stock equivalents
would have reduced earnings per share by 70 cents.
The effect of possible exercise of a common stock options would have increased earnings
per share.
That means the 75 cents are dilutive.
Do you include dilutive?
Yes.
The 10 cents is antidilutive.
Do you include that?
No.
What amount would be reported as diluted?
Remember you take each item, each security individually.
Some are dilutive, some are anti, only include those that are dilutive.
In this particular case, what would we be?
We'd have $15 minus 75 cents which gives you 14.25, that's what we're looking at