Another good EPS one !!

CFA Level I
#1

Char-lee and annexguy I think u’ll like it :wink: The following data pertains to the Sapphire Company: Net income equals $15,000 5,000 shares of common stock issued on January 1st 10 percent stock dividend issued on June 1st 1000 shares of common stock were repurchased on July 1st 1000 shares of 10 percent, par $100 preferred stock each convertible into 8 shares of common were outstanding the whole year. What is the company’s diluted earnings per share (EPS)? A. $2.50. B. $1.15. C. $1.20. D. $1.00. --------------------------------------------------------------------------------------------------------------- An analyst has gathered the following information about Barnstabur, Inc., for the year 2001: Reported net income of $30,000. 5,000 shares of common stock and 2,000 shares of 8 percent, $90 par preferred stock outstanding during the whole year. During 2000, Barnstabur issued at par, $60,000 of par, 6.0 percent convertible bonds, with each of the 60 bonds convertible into 110 shares of the Barnstabur common stock. If Barnstabur’s effective tax rate is 40 percent what will Barnstabur report for 2001’s diluted earnings per share (EPS)? A. $1.66. B. $2.36. C. $1.53. D. $1.25. (I’m not that confident with EPS that’s why I’m looking for all kind of Q, I think it is a good idea to share as I also learn from ur feedback. thanks)

#2

Q1: Numerator: (15000 - 1000 * 100 * .1 ) = 5000 Denominator: 5000 * 1.1 * 12/12 - 1000 * 6/12 = 5000 Basic EPS: 1.00 Diluted EPS: Numerator: 15000 Denominator: 5000 + 8000 = 13000 Diluted EPS > 1.00 So Answer D Q2: Basic EPS: (30000 - 2000 * 90 * .08) / 5000 = 3.12 Diluted EPS: (30000 - 2000 * 90 * .08 + 60000 * .06 * (1-.4)) / (5000 + 60*110) = 1.53 Answer C CP

#3

Why do we deduct from NI 1000 shares of 10 percent, par $100 preferred stock in question 1??? 'Numerator: (15000 - 1000 * 100 * .1 ) = 5000 ’

#4

Preferred Dividend

#5

CP is the guru. in Q1, after calculation of basic EPS=$1, and given $1 is smallest amount among choice, I choosed D immediately, because dilutive EPS must be <= basic EPS. However, this is to speed up in exam, we still need to know the mechanism behind first .

#6

“However, this is to speed up in exam, we still need to know the mechanism behind first .” U cannot be more correct !! cpk123 gave correct answer ! :wink: