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M O N D A Y , D E C E M B E R 1 5 , 2 0 0 8
MULTIPLE CHOICEConceptual

1. With respect to the calculation of earnings per share, which of the following would
be most indicative of a simple capital structure?
c. Ownership interest consisting solely of common shares

2. In calculating earnings per share for a simple capital structure, if the preferred
shares are cumulative, the amount that should be deducted as an adjustment to the
numerator (earnings) is the
d. none of these.

3. In calculations of weighted average of shares outstanding, when a stock dividend or
stock split occurs, the additional shares are
d. considered outstanding at the beginning of the earliest year reported.

4. What effect will the acquisition of treasury shares have on shareholders' equity and
earnings per share, respectively?
c. Decrease and increase

5. When calculating diluted earnings per share, convertible bonds are
d. assumed converted only if they are dilutive.

6. Dilutive convertible securities must be used in the calculation of
b. diluted earnings per share only.

7. In calculating earnings per share, the equivalent number of convertible preferred
shares are added as an adjustment to the denominator (number of shares
outstanding). If the preferred shares are cumulative, which amount should then be
added as an adjustment to the numerator (net earnings)?
a. Annual preferred dividend

8. In the diluted earnings per share calculation, the treasury shares method is used
for options and warrants to reflect assumed reacquisition of common shares at the
average market price during the period. If the exercise price of the options or
warrants exceeds the average market price, the calculation would
d. be antidilutive.

9. In applying the treasury shares method to determine the dilutive effect of shares
options and warrants, the proceeds assumed to be received upon exercise of the
options and warrants
a. are used to calculate the number of common shares repurchased at the average
market price, when calculating diluted earnings per share.

10. When applying the treasury shares method for diluted earnings per share, the
market price of the common shares used for the repurchase is the
b. average market price.

11. Antidilutive securities
d. should be ignored in all earnings per share calculations.

12. Assume there are two dilutive convertible securities. The one that should be used
first to recalculate earnings per share is the security with the
d. smaller earnings per share adjustment.



MULTIPLE CHOICEComputational

13. Aba Corp. had 600,000 common shares outstanding on January 1, issued 900,000
shares on July 1, and had income applicable to common shares of $630,000 for the
year ending December 31, 2006. Earnings per share for 2006 would be
c. $.60.

14. At December 31, 2006, Meyer Company had 500,000 common shares issued and
outstanding, 400,000 of which had been issued and outstanding throughout the year
and 100,000 of which were issued on October 1, 2006. Net income for the year ended
December 31, 2006, was $510,000. What should be Meyer's 2006 earnings per common
share, rounded to the nearest penny?
c. $1.20

15. Ava Co. had 600,000 common shares outstanding on January 1, issued 84,000
shares on May 1, purchased 42,000 treasury shares on September 1, and issued 36,000
shares on November 1. The weighted average shares outstanding for the year is
b. 648,000.

16. On January 2, 2006, Starr Co. issued at par $10,000 of 6% bonds convertible in
total into 1,000 of Starr's common shares. No bonds were converted during 2006.
Throughout 2006, Starr had 1,000 shares of common shares outstanding. Starr's 2006
net income was $6,000. Starr's income tax rate is 30%.
No potentially dilutive securities other than the convertible bonds were outstanding
during 2006. Starr's diluted earnings per share for 2006 would be (rounded to the
nearest penny)
b. $3.21.

17. At December 31, 2005, Collins Company had 500,000 common shares outstanding.
On October 1, 2006, an additional 100,000 common shares were issued. In addition,
Collins had $5,000,000 of 6% convertible bonds outstanding at December 31, 2005,
which are convertible into 225,000 common shares. No bonds were converted into
common shares in 2006. The net income for the year ended December 31, 2006, was
$1,500,000. Assuming the income tax rate was 30%, the diluted earnings per share for
the year ended December 31, 2006, should be (rounded to the nearest penny)
c. $2.28.

18. On January 2, 2006, Dane Co. issued at par $300,000 of 9% convertible bonds.
Each $1,000 bond is convertible into 30 shares. No bonds were converted during 2006.
Dane had 50,000 common shares outstanding during 2006. Dane's 2006 net income was
$160,000 and the income tax rate was 30%. Dane's diluted earnings per share for 2006
would be (rounded to the nearest penny)
b. $3.03.

19. At December 31, 2005, Marris Co. had 800,000 common shares outstanding. In
addition, Marris had 300,000 preferred shares which were convertible into 500,000
common shares. During 2006, Mraris paid $300,000 in cash dividends on the common
shares and $200,000 in cash dividends on the preferred shares. Net income for 2006
was $1,700,000 and the income tax rate was 40%. The diluted earnings per share for
2006 is (rounded to the nearest penny)
b. $1.31.

Use the following information for questions 20 and 21.

Edwards Co. had 200,000 common shares, 30,000 convertible preferred shares, and
$1,500,000 of 10% convertible bonds outstanding during 2006. The preferred shares
are convertible into 40,000 common shares. During 2006, Edwards paid dividends of
$1.20 per share on the common shares and $3.00 per share on the preferred shares.
Each $1,000 bond is convertible into 45 common shares. The net income for 2006 was
$900,000 and the income tax rate was 30%.

20. Basic earnings per share for 2006 is (rounded to the nearest penny)
b. $4.05.

21. Diluted earnings per share for 2006 is (rounded to the nearest penny)
c. $3.27.

22. Sultan, Incorporated, has 6,000,000 common shares outstanding on December 31,
2005. An additional 1,000,000 common shares were issued on April 1, 2006, and
500,000 more on July 1, 2006. On October 1, 2006, Sultan issued 25,000, $1,000 face
value, 8% convertible bonds. Each bond is convertible into 20 common shares. No
bonds were converted in 2006. What is the number of shares to be used in calculating
basic earnings per share and diluted earnings per share, respectively?
b. 7,000,000 and 7,125,000

23. Gregg Co. has 1,000,000 common shares outstanding on December 31, 2005. An
additional 100,000 shares are issued on April 1, 2006, and 240,000 more on September
1. On October 1, Gregg issued $3,000,000 of 9% convertible bonds. Each $1,000 bond
is convertible into 40 common shares. No bonds have been converted. The number of
shares to be used in calculating basic earnings per share and diluted earnings per
share on December 31, 2006 is
b. 1,155,000 and 1,185,000.

24. At December 31, 2005, Bowen Company had 2,000,000 common shares
outstanding. On January 1, 2006, Bowen issued 500,000 preferred shares which were
convertible into 1,000,000 common shares. During 2006, Bowen declared and paid
$900,000 cash dividends on the common shares and $300,000 cash dividends on the
preferred shares. Net income for the year ended December 31, 2006, was $3,000,000.
Assuming an income tax rate of 30%, what should be diluted earnings per share for the
year ended December 31, 2006? (Round to the nearest penny.)
b. $1.00

25. Cisco Company had 300,000 common shares issued and outstanding at December
31, 2005. During 2006, no additional common shares were issued. On January 1, 2006,
Cisco issued 400,000 nonconvertible preferred shares. During 2006, Cisco declared and
paid $180,000 cash dividends on the common shares and $150,000 on the preferred
shares. Net income for the year ended December 31, 2006, was $960,000. What
should be Cisco's 2006 earnings per common share, rounded to the nearest penny?
c. $2.70

26. At December 31, 2005, Keynes Company had 900,000 common shares outstanding.
On September 1, 2006, an additional 300,000 common shares were issued. In addition,
Keynes had $10,000,000 of 6% convertible bonds outstanding at December 31, 2005,
which are convertible into 600,000 common shares. No bonds were converted in 2006.
The net income for the year ended December 31, 2006, was $3,750,000. Assuming the
income tax rate was 30%, what should be the diluted earnings per share for the year
ended December 31, 2006, rounded to the nearest penny?
c. $2.61

27. Hart Company has 4,000,000 common shares outstanding on December 31, 2005.
An additional 250,000 common shares were issued on July 1, 2006, and 500,000 more
on October 1, 2006. On April 1, 2006, Hart issued 10,000, $1,000 face value, 8%
convertible bonds. Each bond is convertible into 40 common shares. No bonds were
converted in 2006. What is the number of shares to be used in calculating basic
earnings per share and diluted earnings per share, respectively, for the year ended
December 31, 2006?
a. 4,250,000 and 4,550,000

Use the following information for questions 28 and 29.

Information concerning the capital structure of Sen Corporation is as follows:
December 31,
2006 2005
Common shares 100,000 shares 100,000 shares
Convertible preferred shares 10,000 shares 10,000 shares
9% convertible bonds $2,000,000 $2,000,000

During 2006, Sen paid dividends of $1.00 per share on its common shares and $2.50
per share on its preferred shares. The preferred shares are convertible into 20,000
common shares. The 9% convertible bonds are convertible into 50,000 common
shares. The net income for the year ended December 31, 2006, was $500,000. Assume
that the income tax rate was 30%.

28. What should be the basic earnings per share for the year ended December 31,
2006, rounded to the nearest penny?
c. $4.75

29. What should be the diluted earnings per share for the year ended December 31,
2006, rounded to the nearest penny?
b. $3.68

30. Warrants exercisable at $20 each to obtain 50,000 common shares were
outstanding during a period when the average market price of the common shares was
$25. Application of the treasury shares method for the assumed exercise of these
warrants in calculating diluted earnings per share will increase the weighted average
number of outstanding shares by
c. 10,000.

31. Dextar Corporation had 300,000 common shares outstanding at December 31,
2006. In addition, it had 90,000 stock options outstanding, which had been granted to
certain executives, and which gave them the right to purchase Dextar's shares at an
option price of $37 per share. The average market price of Dextar's common shares
for 2006 was $50. What is the number of shares that should be used in calculating
diluted earnings per share for the year ended December 31, 2006?
d. 323,400



DERIVATIONS Computational

No. Answer Derivation
13. c = $.60.

14. c = $1.20.

15. b 600,000 + (84,000 8/12) (42,000 4/12) + (36,000 2/12) = 648,000.

16. b = $3.21.

17. c = $2.28.

18. b = $3.03.

19. b = $1.31.

20. b = $4.05.

21. c = $3.27.

22. b 6,000,000 + (1,000,000 9/12) + (500,000 6/12) = 7,000,000 (BEPS)
7,000,000 + (25,000 20 3/12) = 7,125,000 (DEPS).

23. b 1,000,000 + (100,000 9/12) + (240,000 4/12) = 1,155,000.
1,155,000 + = 1,185,000.

No. Answer Derivation
24. b = $1.00.

25. c = $2.70.

26. c = $2.61.

27. a 4,000,000 + (250,000 6/12) + (500,000 3/12) = 4,250,000
4,250,000 + (10,000 40 9/12) = 4,550,000.

28. c = $4.75.

29. b = $3.68.

30. c 50,000 $20 $25 = 40,000
50,000 40,000 = 10,000.

31. d 90,000 (90,000 $37 $50) = 23,400
300,000 + 23,400 = 323,400.
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