Deck 5: Earnings Per Share

Question 1

What EPS information disclosure is required from private companies that choose to apply international standards?

Answer 1

For private companies that choose to apply international standards, IFRS also does not require such companies to disclose EPS information unless they are in the process of going public (IAS 33 paragraph 2).

Question 2

Which statement is correct about basic EPS?

A)It indicates the net income before tax attributable to a company's ordinary shares.
B)It indicates the net income before tax attributable to a company's preferred shares.
C)It indicates the net income attributable to a company's preferred shares.
D)It indicates the net income attributable to a company's ordinary shares.

Answer 2

D

Question 3

Which statement is correct about earnings per share (EPS)?

A)EPS does not need to be disclosed under IFRS.
B)EPS needs to be disclosed under IFRS.
C)EPS is calculated for preferred shares.
D)EPS is a ratio used to assess leverage.

Answer 3

B

Question 4

Explain the difference between basic and diluted EPS.

Question 5

Which statement is correct?

A)Companies with a simple capital structure must disclose diluted EPS.
B)Companies with a complex capital structure must disclose diluted EPS.
C)Companies with a simple capital structure do not need to disclose basic EPS.
D)Companies with a complex capital structure do not need to disclose diluted EPS.

Question 6

Which of the following is correct about the difference between basic earnings per share (EPS)and diluted earnings per share?

A)Basic EPS uses total common shares outstanding, whereas diluted EPS uses the weighted-average number of common shares.
B)Basic EPS is not a required disclosure, whereas diluted EPS is required disclosure.
C)Basic EPS is not adjusted for the potential dilutive effects of complex financial structures, whereas diluted EPS is adjusted.
D)Basic EPS uses comprehensive income in its calculation, whereas diluted EPS does not.

Question 7

Which statement is correct about basic EPS?

A)It is an indicator of profitability that communicates ownership of earnings attributable to a company's dilutive shares.
B)It is an indicator of profitability that communicates ownership of earnings attributable to a company's ordinary shares.
C)It indicates the market price attributable to a company's ordinary shares.
D)It indicates the market price attributable to a company's dilutive shares.

Question 8

What is the meaning of "net income attributable to ordinary shareholders"?

A)It means net income plus dividends on common and preferred shares.
B)It means net income less dividends on preferred shares.
C)It means net income plus dividends on common shares.
D)It means net income less dividends on common and preferred shares.

Question 9

Which statement is correct?

A)Basic EPS is based on the dilutive shares outstanding at the end of the year.
B)Basic EPS is based on the dilutive shares outstanding during the year.
C)Basic EPS is based on the ordinary shares outstanding at during the year.
D)Basic EPS is based on the ordinary shares outstanding at the end of the year.

Question 10

Which statement is correct about earnings per share (EPS)?

A)EPS does not provide decision-useful information to investors.
B)EPS represents the ordinary share's market value.
C)EPS represents the company's market value.
D)EPS can be used to predict future earnings by analysts.

Question 11

Explain why the IASB requires the disclosure of basic and diluted EPS.

Question 12

Which statement is correct about basic EPS?

A)It is calculated on the shares outstanding at the beginning of the year.
B)It is calculated on the shares outstanding at the end of the year.
C)It is calculated on the shares issued during the year.
D)It is calculated on the shares outstanding during the year.

Question 13

Which statement is correct about earnings per share (EPS)?

A)A company's total earnings is more meaningful than its EPS.
B)EPS represents the total amount of earnings of a company.
C)EPS measures an ordinary share's interest in a company's earnings.
D)The EPS is directly correlated with the company's stock price.

Question 14

Briefly explain the main the difference in the requirements of IFRS and ASPE in regards to EPS information.

Question 15

Explain why private companies are not required to report EPS under according to ASPE.

Question 16

Which statement is correct?

A)Diluted EPS decreases the comparability of financial statements.
B)Diluted EPS decreases the understandability of financial statements.
C)Diluted EPS addresses the moral hazard information asymmetry.
D)Diluted EPS is calculated in the same manner as basic EPS.

Question 17

Which statement is correct?

A)A complex capital structure includes potentially dilutive securities.
B)A complex capital structure excludes potentially dilutive securities.
C)EPS applies only to a company with a complex capital structure.
D)A company with a complex capital structure calculates only basic EPS.

Question 18

Which statement is correct?

A)Diluted EPS assumes that all dilutive securities are converted.
B)Diluted EPS assumes that all antidilutive and dilutive securities are converted.
C)Diluted EPS assumes that all ordinary securities are converted.
D)Diluted EPS assumes that all ordinary and dilutive securities are converted.

Question 19

Which statement is correct?

A)A simple capital structure includes potentially dilutive securities.
B)A simple capital structure excludes potentially dilutive securities.
C)EPS applies only to a company with a simple capital structure.
D)A company with a simple capital structure does not need to calculate EPS.

Question 20

Which statement is correct?

A)Basic EPS increases the understandability of financial statements.
B)Basic EPS decreases the understandability of financial statements.
C)Basic EPS addresses the moral hazard information asymmetry.
D)Basic EPS can be calculated in different ways by different companies.

Question 21

Which statement is correct about the "net income attributable to ordinary shareholders"?

A)Other comprehensive income (OCI)is included in this calculation.
B)Other comprehensive income (OCI)is excluded from this calculation.
C)Dividends to preferred shareholders are added to the net income.
D)Dividends to common shareholders are added to the net income.

Question 22

For the year ended December 31, 2021, Harvest Productions Inc. earned $4,000,000. Outstanding preferred shares included $400,000 in 3% cumulative preferred shares issued on January 1, 2020 and $500,000 in 2% non-cumulative preferred shares issued on January 1, 2021. Dividends on the cumulative preferred shares were not declared in 2020. On December 15, 2021, Harvest declared $10,000 in dividends on the non-cumulative preferred shares, payable on January 15, 2022. Dividends on the cumulative preferred shares are neither declared nor paid.
Required:
Determine the net income available to ordinary shareholders for the year ended December 31, 2021.

Question 23

What is the meaning of "weighted average number of ordinary shares outstanding"?

A)This is not used in the EPS calculation.
B)This refers to the numerator of the EPS calculation.
C)This refers to the denominator of the basic EPS calculation.
D)This is the not used in the diluted EPS calculation.

Question 24

Explain how the dividends on non-cumulative preferred shares are adjusted in the EPS calculation. What is the underlying logic for this adjustment?

Question 25

For the year ended December 31, 2021, Jovial Productions Inc. earned $13,000,000. Outstanding preferred shares included $1,500,000 in 9% cumulative preferred shares issued on January 1, 2018 and 32,000 $160 non-cumulative preferred shares issued on January 1, 2020 that are each entitled to dividends of $7 per annum. Dividends were neither declared nor paid on either class of the preferred shares in 2019 or 2020. On December 15, 2021, the company declared and paid the $270,000 dividends in arrears on the 9% cumulative preferred shares. The company also declared and paid $224,000 dividends on the non-cumulative preferred shares.
Required:
Determine the net income available to ordinary shareholders for the year ended December 31, 2021.

Question 26

Which statement is correct?

A)Share issuances increase the EPS denominator.
B)Stock splits have the same effect on EPS as share issuances.
C)Stock dividends have the same effect on EPS as share issuances.
D)Share issuances decrease the EPS denominator.

Question 27

For the year ended December 31, 2020, Jovial Productions Inc. earned $13,000,000. Outstanding preferred shares included $1,500,000 in 9% cumulative preferred shares issued on January 1, 2017 and 32,000 $160 non-cumulative preferred shares issued on January 1, 2019 that are each entitled to dividends of $7 per annum. Dividends were neither declared nor paid on either class of the preferred shares in 2018 or 2019. On December 15, 2020, the company declared $150,000 dividends on the 4% cumulative preferred shares and $150,000 in dividends on the non-cumulative preferred shares, both payable on January 15, 2021.
Required:
Determine the net income available to ordinary shareholders for the year ended December 31, 2020.

Question 28

Which statement is correct?

A)Share issuances decrease the EPS numerator.
B)Stock splits have the same effect on EPS as share issuances.
C)Share issuances increase number of shares.
D)Share issuances decrease the EPS denominator.

Question 29

Explain how the dividends on cumulative preferred shares are adjusted in the EPS calculation. What is the underlying logic for this adjustment?

Question 30

For the year ended December 31, 2021, Harvest Productions Inc. earned $4,000,000. Outstanding preferred shares included $400,000 in 3% cumulative preferred shares issued on January 1, 2020 and $500,000 in 2% non-cumulative preferred shares issued on January 1, 2021. Dividends on the cumulative preferred shares were not declared in 2020.
Harvest did not declare any dividends during 2021.
Required:
Determine the net income available to ordinary shareholders for the year ended December 31, 2021.

Question 31

For stock splits and stock dividends, while it is possible to state the number of shares as beginning-of-year equivalents, it makes more sense to use end-of-year equivalents because financial statement readers are evaluating EPS after the end of the year. Explain why the adjustment for stock splits and stock dividends is standardized.

Question 32

Which statement is correct about the "weighted average number of ordinary shares outstanding" (WASO)?

A)Stock repurchases do not impact the WASO.
B)The actual date of share issuances is ignored in the WASO.
C)The actual date of stock splits is ignored in the WASO.
D)Stock dividends do not impact the WASO.

Question 33

Which statement is correct about "weighted average number of ordinary shares outstanding"?

A)Treasury shares that are cancelled are adjusted in this calculation.
B)Treasury shares that are not cancelled are adjusted in this calculation.
C)Treasury shares that are repurchased are adjusted in this calculation.
D)Treasury shares are ignored for purposes of this calculation.

Question 34

What is the meaning of "net income attributable to ordinary shareholders"?

A)This is not used in the EPS calculation.
B)This refers to the numerator of the EPS calculation.
C)This refers to the denominator of the EPS calculation.
D)This is the not used in the diluted EPS calculation.

Question 35

For the year ended December 31, 2020, Jovial Productions Inc. earned $13,000,000. Outstanding preferred shares included $1,500,000 in 9% cumulative preferred shares issued on January 1, 2017 and 32,000 $160 non-cumulative preferred shares issued on January 1, 2019 that are each entitled to dividends of $7 per annum. Dividends were neither declared nor paid on either class of the preferred shares in 2018 or 2019. On December 15, 2020, the company declared and paid $140,000 of the dividends in arrears on the 9% cumulative preferred shares.
Required:
Determine the net income available to ordinary shareholders for the year ended December 31, 2020.

Question 36

Explain why dividends to preferred shareholders are adjusted in the numerator of the EPS calculation.

Question 37

Explain why other comprehensive income is excluded from the numerator of the EPS calculation.

Question 38

Which statement is correct about the "weighted average number of ordinary shares outstanding" (WASO)?

A)It is used only in the numerator of the EPS calculation.
B)The weighted average is the number of shares outstanding at the beginning of the year.
C)The weighted average accounts for changes in shares issued or cancelled during the year.
D)It is used only in the denominator of the diluted EPS calculation.

Question 39

For the year ended December 31, 2022, Harvest Productions Inc. earned $4,000,000. Outstanding preferred shares included $400,000 in 3% cumulative preferred shares issued on January 1, 2021 and $500,000 in 2% non-cumulative preferred shares issued on January 1, 2022. Dividends on the cumulative preferred shares were not declared in 2021. On December 15, 2022, Harvest declared and paid $24,000 in dividends on the 3% cumulative shares including the arrears. Harvest also declared and paid the $10,000 dividends on the non-cumulative shares.
Required:
Determine the net income available to ordinary shareholders for the year ended December 31, 2022.

Question 40

Ned Company reported the following information for its fiscal year: Net income
$500,000
Preferred dividends
30,000
Common share dividends
20,000
Preferred shares are cumulative and carry an annual dividend of
10,000
The preferred dividends listed above include the current year and prior accumulated dividends. What is the amount of net income available to common shareholders?

A)$440,000
B)$450,000
C)$470,000
D)$490,000

Question 41

Calculate the incremental EPS for the following instrument: Convertible bonds outstanding, yield of 5% and coupon rate of 5%
$2,000,000
Issue date
January 1, 2019
Maturity date
December 31, 2024
Conversion rate for each $1,000 bond
20 ordinary shares
Tax rate
25%

A)0.63
B)1.88
C)40,000
D)75,000

Question 42

Accu Tech Renovations Corp. (ATRC)was incorporated on January 1, 2021. At that time it issued 100,000 ordinary shares; 80,000, $20, 3% preferred shares "A"; and 40,000, $20, 6% preferred shares "B." Net income for the year ended December 31, 2021 was $1,800,000. ATRC declares and pays total of $238,000 in dividends. Both the preferred shares series A and B are cumulative in nature. Series A must be fully paid their current entitlement as well as any arrears before any monies are paid to the Series B shareholders.
Required:
Compute basic EPS.

Question 43

Which statement is correct about potential ordinary shares (POS)?

A)Dilutive POS decrease EPS.
B)Dilutive POS increase EPS.
C)Anti-dilutive POS decrease EPS.
D)Anti-dilutive POS are included in EPS.

Question 44

Calculate the income effect on the incremental EPS for the following instrument: Convertible bonds outstanding, yield of 8% and coupon rate of 8%
$5,000,000
Issue date
January 1, 2021
Maturity date
December 31, 2028
Conversion rate for each $1,000 bond
25 ordinary shares
Income tax rate
30%

A)$0.96
B)$2.24
C)$120,000
D)$280,000

Question 45

Which statement is correct about the "income effect" on EPS?

A)This is the incremental before-tax income available to ordinary shareholders.
B)This is the incremental after-tax income available to ordinary shareholders.
C)This is the incremental number of ordinary shares outstanding before conversion.
D)This is the incremental number of ordinary shares outstanding after conversion.

Question 46

Which statement is correct about the "if-converted" method for EPS?

A)This method assumes the interest is paid on the convertible security until it was converted into ordinary shares.
B)This method assumes the interest is paid on the convertible security for one-half of the year.
C)This method assumes the interest is paid on the convertible security for the period after its issue date.
D)This method assumes the no interest is paid on the convertible security for the entire year.

Question 47

Hamm Corporation had 200,000 ordinary shares outstanding on January 1, 2021. On April 1, 2021, Hamm issued an additional 120,000 shares. On July 1, 2021, Hamm repurchased 20,000 ordinary shares and cancelled them. On October 1, 2021, Hamm issued an additional 50,000 ordinary shares.
Required:
a. What was the weighted average number of ordinary shares outstanding in 2021?
b. Assume that on July 1, 2021 Hamm repurchased the shares and held them as treasury shares. Will the weighted average number of ordinary shares outstanding in 2019 change from the amount in part a? Why or why not?

Question 48

Micky and Donald Corp. was founded on January 1, 2021. At that time it issued 120,000 ordinary shares and 20,000, $30, cumulative 5% preferred shares. Subsequent transactions affecting its shareholdings follow. Required:
a. What was Micky's weighted average number of ordinary shares outstanding in 2022?
b. What was Micky's basic EPS in 2022?

Question 49

Calculate the incremental EPS for the following instrument: Convertible bonds outstanding, yield of 6% and coupon rate of 6%
$3,000,000
Issue date
January 1, 2019
Maturity date
December 31, 2024
Conversion rate for each $1,000 bond
20 ordinary shares
Income tax rate
30%

A)0.63
B)1.88
C)40,000
D)2.10

Question 50

Which statement is correct about the "share effect" on EPS?

A)This is the incremental before-tax income available to ordinary shareholders.
B)This is the incremental after-tax income available to ordinary shareholders.
C)This is the incremental number of ordinary shares outstanding before conversion.
D)This is the incremental number of ordinary shares outstanding after conversion.

Question 51

Traditional Bathrooms Inc. (TBI)had 80,000 ordinary shares outstanding on January 1, 2020. Transactions throughout 2020 affecting its shareholdings follow.
• February 1: TBI issued 200,000, $10, cumulative 10% preferred shares.
• March 1: TBI issued 40,000 ordinary shares.
• April l: TBI declared and issued a 8% stock dividend on the ordinary shares.
• July 1: TBI repurchased and cancelled 30,000 ordinary shares.
• October 1: TBI declared and issued a 3-for-l stock split on the ordinary shares.
• December 31: TBI declared $99,600 in dividends on the ordinary shares.
• Net income for the year ended December 31, 2020 was $600,000. Its tax rate was 40%.
Required:
a. What was weighted average number of ordinary shares outstanding in 2020?
b. What was basic EPS in 2020?
c. If the preferred shares issued on February 1, 2020 were non-cumulative, what would basic EPS for 2020 have been?

Question 52

Which of the following are financial instruments that give rise to POS?

A)Convertible bonds that can be exchanged for cumulative preferred shares.
B)Convertible preferred shares that can be exchanged for ordinary shares.
C)Land that can be exchanged for preferred shares.
D)Stock options and warrants that permit the holder to buy preferred shares from the company at a predetermined price.

Question 53

Accu Tech Renovations Corp. (ATRC)was incorporated on January 1, 2021. At that time it issued 100,000 ordinary shares; 80,000, $20, 3% preferred shares "A"; and 40,000, $20, 6% preferred shares "B." Net income for the year ended December 31, 2021 was $1,800,000. ATRC declares and pays total of $238,000 in dividends. The series A preferred shares arc cumulative and the series B preferred shares are non-cumulative. Series A must be fully paid their current entitlement before any monies are paid to the Series B shareholders.
Required:
Compute basic EPS.

Question 54

Which statement is correct?

A)Diluted EPS will always be less than basic EPS.
B)Diluted EPS will always be greater than basic EPS.
C)Diluted EPS will always be equal to EPS.
D)Diluted EPS will be less than or equal to basic EPS.

Question 55

What is the meaning of an "in the money call option"?

A)A call option is in-the-money when the market price means that it will expire un-exercised.
B)A call option is in-the-money if the market price of the share equals the exercise price.
C)A call option is in-the-money if the market price of the share is less than the exercise price.
D)A call option is in-the-money if the market price of the share exceeds the exercise price.

Question 56

Accu Tech Renovations Corp. (ATRC)was incorporated on January 1, 2021. At that time it issued 100,000 ordinary shares; 80,000, $20, 3% preferred shares "A"; and 40,000, $20, 6% preferred shares "B." Net income for the year ended December 31, 2021 was $1,800,000. ATRC declares and pays total of $238,000 in dividends. Both the preferred shares series A and B are non-cumulative in nature. Series A must be fully paid their current entitlement before any monies are paid to the Series B shareholders.
Required:
Compute basic EPS.

Question 57

Calculate the incremental EPS for the following instrument: Convertible bonds outstanding, yield of 6% and coupon rate of 6%
$3,500,000
Issue date
January 1, 2021
Maturity date
December 31, 2028
Conversion rate for each $1,000 bond
40 ordinary shares
Income tax rate
30%

A)1.05
B)1.88
C)40,000
D)3.15

Question 58

Which statement is correct?

A)The numerator for diluted EPS is the same as the numerator for basic EPS.
B)Potential ordinary shares are derivative instruments that entitle the holder to commodities.
C)Potential ordinary shares are financial instruments that entitle the holder to ordinary shares.
D)The numerator for diluted EPS is always greater than the numerator for basic EPS.

Question 59

Calculate the incremental EPS for the following instrument: Convertible bonds outstanding, yield of 3% and coupon rate of 3%
$5,000,000
Issue date
January 1, 2021
Maturity date
December 31, 2028
Conversion rate for each $1,000 bond
25 ordinary shares
Income tax rate
30%

A)$0.36
B)$0.84
C)$40.00
D)$105,000

Question 60

Which statement is correct about the "if-converted" method for EPS?

A)This method assumes the convertible security is converted into ordinary shares at the end of the fiscal period.
B)This method assumes the convertible security is converted into ordinary shares at the beginning of the fiscal period.
C)This method assumes the convertible security is converted into ordinary shares evenly over the fiscal period.
D)This method assumes the convertible security is converted into ordinary shares at the mid-point of the fiscal period.

Question 61

Explain the "income effect" and "share effect" as they apply to the calculation of incremental EPS.

Question 62

Calculate the incremental EPS for the following instrument: Face value of 10,000 preferred shares with dividend rate of 5%
$1,000,000
Conversion rate for each preferred share
25 ordinary shares
Income tax rate
30%

A)$0.14
B)$0.20
C)$1.40
D)$2.00

Question 63

Know Your Rights Co. has three stock option plans outstanding on December 31, 2020. They provide the holders with the following entitlements:
• Stock option A-The holders may purchase 55,000 ordinary shares at any time on or before December 31, 2024 for $41 each.
• Stock option B-The holders may purchase 2,000 ordinary shares at any time on or before December 31, 2021 for $47 each. From January 1, 2022 to December 31, 2024 the holders may purchase 7,000 ordinary shares for $52 each.
• Stock option C-The holders may purchase 12,000 ordinary shares at any time on or before December 31, 2022 for $51 each.
The average price of ordinary shares in 2020 was $50 and its basic EPS from continuing operations for the year was $1.01.
Required:
a. Which of the stock options are dilutive and which are antidilutive in 2020? What is the rule in this respect?
b. Assuming that all three option plans have been in place the entire year, for each plan, determine the incremental number of shares, if any, that need to be considered for diluted EPS purposes.
c. Assume that stock option A was issued on April 1, 2020. Does this change your answer to part b? If so, what is the revised number of incremental shares for option A that need to be considered for diluted EPS purposes?

Question 64

Since, the objective of reporting diluted EPS is to provide the lowest possible EPS figure, we include all dilutive POS but exclude any antidilutive POS. What are the four steps in the process to separate dilutive from antidilutive POS and to calculate diluted EPS?

Question 65

Calculate the income effect on the incremental EPS for the following instrument: Face value of 50,000 preferred shares with dividend rate of 5%
$5,000,000
Conversion rate for each preferred share
5 ordinary shares
Income tax rate
30%

A)$1.00
B)$75,000
C)$175,000
D)$250,000

Question 66

Which statement is correct?

A)Out of the money stock options are the most dilutive.
B)Convertible bonds are the most dilutive.
C)Convertible preferred shares are the most dilutive.
D)In the money stock options are the most dilutive.

Question 67

What is the meaning of "at-the-money options"?

A)An option is at-the-money when the market price means that it will be exercised.
B)An option is at-the-money if the market price of the share equals the exercise price.
C)An option is at-the-money if the market price of the share is less than the exercise price.
D)An option is at-the-money if the market price of the share exceeds the exercise price.

Question 68

Calculate the share effect on the incremental EPS for the following instrument: Convertible bonds outstanding, yield of 5% and coupon rate of 5%
$2,000,000
Issue date
January 1, 2021
Maturity date
December 31, 2028
Conversion rate for each $1,000 bond
40 ordinary shares
Income tax rate
25%

A)0.63
B)0.94
C)75,000
D)80,000

Question 69

Which statement is correct about diluted EPS?

A)The incremental EPS of the least dilutive item is compared to the basic EPS.
B)The incremental EPS of the most dilutive item is compared to the basic EPS.
C)If the incremental EPS is higher than the basic EPS, the item is dilutive.
D)If the incremental EPS is lower than the basic EPS, the item is anti-dilutive.

Question 70

Calculate the income effect on the incremental EPS for the following instrument: Convertible bonds outstanding, effective yield of 7% and coupon rate of 7%
$2,000,000
Issue date
January 1, 2021
Maturity date
December 31, 2024
Conversion rate for each $1,000 bond
20 ordinary shares
Income tax rate
25%

A)$30,000
B)$35,000
C)$90,000
D)$105,000

Question 71

Which statement is correct?

A)When convertible securities are redeemed during the year, the income effect and share effect are not pro-rated for the diluted EPS calculation.
B)When convertible securities are issued during the year, the income effect and share effect are not pro-rated for the diluted EPS calculation.
C)When the right to convert convertible securities expires during the year, the income effect and share effect are pro-rated for the diluted EPS calculation.
D)When convertible securities are issued at the beginning of the year, the income effect and share effect are pro-rated for the diluted EPS calculation.

Question 72

Explain why only in-the-money options need be considered in the diluted EPS calculations.

Question 73

The net income for Cedarsprings Retreat Centre for the year ended December 31, 2020, was $800,000. Cedarsprings had 50,000 ordinary shares outstanding at the beginning of the year. Cedarsprings declared and distributed a three-for-one stock split on May 1, 2020 and issued (sold)30,000 ordinary shares on November 1, 2020. Select details of Cedarsprings' liabilities and equities follow:
Bonds A-$2,000,000, 6%, 10-year, semi-annual bonds issued on July 1, 2020. At the option of the holder, each $1,000 bond can be converted into 14 ordinary shares at any time before expiry.
Bonds B-$2,000,000, 5%, semi-annual bonds maturing September 30, 2024. The owners of the bonds elect to convert them into 12,000 ordinary shares on December 1, 2020.
200,000 cumulative preferred shares that are each entitled to dividends of $2.00 per annum. Dividends are not declared in 2020. Cedarsprings' corporate tax rate was 40%. The recorded conversion factor for the convertible bonds has already been adjusted for the stock split.
Required: Assuming that the effective rate of interest on the bonds equals the coupon rate:
a)Calculate Cedarsprings' basic earnings per share for 2020.
b)Prepare a schedule that sets out the income effect, share effect, and incremental EPS for each security that is convertible into ordinary shares. Rank the potential ordinary shares by their dilutiveness.
c)Calculate Cedarsprings' diluted earnings per share for 2020.

Question 74

Calculate the share effect on the incremental EPS for the following instrument: Face value of 50,000 preferred shares with dividend rate of 5%
$5,000,000
Conversion rate for each preferred share
5 ordinary shares
Income tax rate
30%

A)5
B)25,000
C)50,000
D)250,000

Question 75

Calculate the income effect on the incremental EPS for the following instrument: Convertible bonds outstanding, yield of 6% and coupon rate of 6%
$2,000,000
Issue date
January 1, 2021
Maturity date
December 31, 2028
Conversion rate for each $1,000 bond
20 ordinary shares
Income tax rate
25%

A)0.75
B)2.25
C)40,000
D)90,000

Question 76

Calculate the incremental EPS for the following instrument: Face value of 10,000 preferred shares with dividend rate of 5%
$5,000,000
Conversion rate for each preferred share
25 ordinary shares
Income tax rate
30%

A)$0.30
B)$0.70
C)$1.00
D)$2.00

Question 77

Describe the procedure for identifying dilutive and antidilutive potential ordinary shares and calculating diluted EPS.

Question 78

Explain the purpose of incremental EPS.

Question 79

What is the meaning of "out-of-the-money warrants"?

A)Warrants are out-of-the-money if the market price of the share exceeds the exercise price.
B)Warrants are out-of-the-money if the market price of the share is less than the exercise price.
C)Warrants are out-of-the-money if the market price of the share equals the exercise price.
D)Warrants are out-of-the-money when the market price means that it will be exercised.

Question 80

What is the formula for diluted EPS? What are dilutive and antidilutive potential ordinary shares and how do they each impact the computation of dilutes EPS?