Chapter 15

Earnings per Share

PROBLEM 1: TRUE OR FALSE

1. TRUE 6. FALSE
2. TRUE 7. TRUE
3. FALSE* 8. TRUE
4. TRUE 9. TRUE
5. FALSE 10. FALSE

*3. FALSE - The company is nevertheless classified as one with simple

capital structure if the convertible securities, stock options, warrants, or other
rights outstanding are antidilutive.

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PROBLEM 2: FOR CLASSROOM DISCUSSION
1. D

2. B

3. A

4. A

5. A

6. D

7. B

8. D

9. B

10. Solution:
[500K - (250K x 4%)] ÷ 200,000 sh. = 2.45

11. Solution:
(600,000 x 110% x 12/12) – (48,000 x 3/12) = 648,000

12. Solution:

  2005 2004

Profit 410,000 350,000

Weighted ave. outs. Sh.

(100,000 x 2 x 12/12) + (20,000 x 2 9/12) 230,000

(100,000 x 2 x 12/12) 200,000

Basic EPS 1.78 1.75

13. Solution:

8M ÷ 440,000a = 18.18
a
(400,000 x 480/450b x 9/12) + (480,000c x 3/12) = (320,000 + 120,000) =
440,000
b
Theoretical/Parity Value – rt. on = (480 – 300) ÷ (5 + 1) = 30
Fair value – ex rt. = (480 – 30) = 450
c
400,000 + (400,000 ÷ 5) = 480,000

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14. Solution:
Diluted EPS = [840,000 – 0 ] ÷ [200,000 + (20,000 x 5)] = 840,000 ÷ (200,000
+ 100,000) = 2.80

15. Solution:
Diluted EPS = [500,000 + (50,000 x 4% x 60%)] ÷ (5,000 + 5,000) = 50.12

16. Solution:
Diluted EPS = 15M ÷ (500,000 + 10,000a) = 29.41
a
[50,000 x (180 + 20)] ÷ 250 = 40,000 assumed treasury shares acquired
50,000 – 40,000 = 10,000 incremental shares

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PROBLEM 3: EXERCISES

1. Solution:
[4M - (2M x 10%)] ÷ 100,000 sh. = 38

2. Solution:
Basic EPS = [15M – (5M x 10%)] ÷ [(30M ÷ 100par) – 50K treasury sh.]
Basic EPS = 58.00

3. Solution:
Jan. 1, 20x3 (1,000,000 x 120% x 2 x 12/12) 2,400,000
(a) (200,000 x 120% x 2 x 11/12) 440,000
(b) -
(c) (60,000 x 2 x 7/12) 70,000

(d) (-75,000 x 2 x 4/12) (50,000)

(e) -
Weighted average outstanding shares 2,860,000

4. Solution:
Jan. 1, 20x3 (500,000 x 110% x 2 x 12/12) 1,100,000
(a) (180,000 x 110% x 2 x 10/12) 330,000
(b) -
(c) (200,000 x 2 x 6/12) 200,000
(d) -
(e) -
(f) (-60,000 x 1/12) (5,000)
Weighted average outstanding shares 1,625,000

5. Solution:
  20x2 20x1

Profit 350,000 410,000

Weighted ave. outs. Sh.

(200,000 x 3 x 12/12) - (30,000 x 3 x 9/12) 532,500

(200,000 x 3 x 12/12) 600,000

Basic EPS 0.66 0.68

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6. Solution:
  2010 2009
Profit 60,000,000 18,000,000
Weighted ave. outstanding sh. (200,000 x
3*) 600,000 600,000
Basic EPS 100.00 30.00

* 200,000 + (200,000 x 2-for-1) = 600,000

7. Solution:
Basic EPS = 6,000,000 ÷ 350,000a = 17.14
a
(300,000 x 160/150b x 3/12) + ( 360,000c x 9/12) = 350,000
b
Theoretical value- right-on = (160 – 100) ÷ (5 + 1) = 10
Fair value – ex rt. = (160 – 10) = 150
c
300,000 + (300,000 ÷ 5) = 360,000

8. Solution:
Basic EPS = 5.5M ÷ 110,000 a = 50.00
a
(100,000 x 16/15 b x 9/12) + 120,000 c x 3/12 = 110,000
b
Theoretical/ Parity value – rt. on = (16 – 10) ÷ (5 + 1) = 1
FV – ex rt. = (16 – 1) = 15
c
100,000 + (100,000 ÷ 5) = 120,000

9. Solution:
Basic EPS = 6M ÷ 350,000 a = 17.14
a
(300,000 x 160/150 b x 3/12) + 360,000 c x 9/12 = 350,000
b
Theoretical/ Parity value – rt. on = (160 – 100) ÷ (5 + 1) = 10
FV – ex rt. = (160 – 10) = 150
c
300,000 + (300,000 ÷ 5) = 360,000

10. Solutions:
Requirement (1):

BEPS = (₱231,500 / 125,000) = ₱1.85 (rounded)

DEPS = ₱231,500 / [125,000 + (8 x 7,500)]

= ₱231,500 / 185,000

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 = ₱1.25 (rounded)

Requirement (2):

BEPS = (₱231,500 - 30,000) / 125,000 = ₱1.61 (rounded)

DEPS = ₱231,500 / (125,000 + 60,000)

= ₱231,500 / 185,000
= ₱1.25 (rounded)

11. Solution:

Diluted EPS = (₱464,000 + ₱160,000 - ₱48,000) / (370,000 +

100,000)
= ₱576,000 / 470,000
= ₱1.23 (rounded)

12. Solutions:

Requirement (1):
BEPS = ₱1,550,000 / [180,000 + (4/12 x 48,000)]
= ₱1,550,000 / 196,000
= ₱7.91 (rounded)

Conversion (600 bonds x 80) = 48,000 shares

Requirement (2):
DEPS = ₱1,550,000 + (₱144,000 x 0.7) / 196,000 +
128,000
= ₱1,650,800 / 324,000
= ₱5.10

Interest Avoided
₱1,200,000 x 9% x 12/12 = ₱108,000
₱ 600,000 x 9%  8/12 = 36,000
₱144,000

Equivalent Shares
1,200 bonds x 12/12 x 80 = 96,000
600 bonds x 80 x 8/12 = 32,000
128,000

13. Solutions:

(1)
BEPS = ₱285,000 / 180,000
= ₱1.58 (rounded)

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(2)
DEPS = ₱285,000 / {180,000 + [(15,000 - 12,000*) x 6/12}
= ₱285,000 / 181,500
= ₱1.57 (rounded)

* (15,000 x ₱20 exercise price) = ₱300,000/₱25 ave. mkt. = 12,000

treasury shares

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PROBLEM 4: CLASSROOM ACTIVITY

1. Solution:
The adjusted profit for Basic EPS computation is determined as
follows:
Profit after tax before adjustment for preferred dividends 2,400,000
One-year cumulative preferred dividends (P1M x 6%) ( 60,000)
Adjusted profit 2,340,000

Basic EPS is computed as follows:

Basic EPS = 2,340,000 ÷ 200,000
Basic EPS = 11.70

2. Solutions:
The weighted average number of outstanding shares is computed as
follows:
Months Weighted
Date No. of shares outstanding average
  (a) (b) (c) = (a) x (b)
Jan. 400,000 x 110% x
1 2 12/12 880,000
May
1 (24,000) x 2 8/12 (32,000)
June
1 120,000 x 2 7/12 140,000
Aug.
1 60,000 x 2 5/12 50,000
Dec.
1 12,000 1/12 1,000
Weighted average number of ordinary
shares 1,039,000

The basic EPS is computed as follows:

Basic EPS = Profit or loss less Preferred dividends ÷ Weighted
average outstanding ordinary shares
Basic EPS = 11,429,000 ÷ 519,500
Basic EPS = 22

3. Solutions:
Requirement (a): Basic earnings per share
The adjusted profit for Basic EPS computation is determined as follows:
Profit after tax before adjustment for preferred
dividends 2,400,000
One-year cumulative preferred dividends
(P1,000,000 x 6%) ( 60,000)
Adjusted profit 2,340,000

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Basic EPS is computed as follows:
Basic EPS = 2,340,000 ÷ 200,000
Basic EPS = 11.70

Requirement (b): Diluted earnings per share

The denominator on the diluted EPS formula is computed as follows:
Weighted average number of outstanding ordinary
Shares 200,000
Incremental shares (50,000 x 2) 100,000
Denominator for diluted EPS computation 300,000

Diluted EPS is computed as follows:

Diluted EPS = 2,400,000 ÷ 300,000
Diluted EPS = 8.00

PROBLEM 5: MULTIPLE CHOICE – THEORY

1. C
2. C
3. A
4. B
5. C

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PROBLEM 6: MULTIPLE CHOICE – COMPUTATIONAL
1. B
Solution:
Profit or loss less Preferred dividends  
Basic
= Weighted average number of outstanding ordinary
EPS
shares  
Basic 1,000,000 – (10,000 x 5% x ₱100)
=
EPS 100,000
Basic EPS = (1,000,000 – 50,000) ÷ 100,000 = 9.50

2. A
Solution:
Profit or loss less Preferred dividends  
Basic
= Weighted average number of outstanding ordinary
EPS
shares  
Basic 960,000 – 100,000
=
EPS (200,000 x 110%)
Basic EPS = 860,000 ÷ 220,000 = 3.91

3. B
Months Weighted
Date No. of shares outstanding average
  (a) (b) (c) = (a) x (b)
Jan. 1 20,000 + 20,000 12/12 40,000
Apr. 1 N/A (effect is on Jan. 1) - -
July 1 6/12
10,000 5,000
Weighted average number of ordinary
shares 45,000

4. C
Solution:
(30,000 + 3,000) x
1/1/x8 Shares outstanding
12/12 33,000
2/1/x8 10% share dividend see effect on Jan. 1
3/1/x8 Business
(9,000 x 10/12)
combination 7,500
7/1/x8 Issued for cash (8,000 x 6/12) 4,000
44,50
Weighted average shares
0

5. B
Solution:
The weighted average outstanding shares are computed as follows:

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 Outstandin Months Weighted
  g shares outstanding average
Jan. 1,
20x3 20,000.00 12/12 20,000
May 1,
20x3 10,500.00 8/12 7,000
27,000

Profit or loss less Preferred dividends  

Basic
= Weighted average number of outstanding ordinary
EPS
shares  
Basic 96,700 – (10,000 x ₱4)
=
EPS 27,000
Basic EPS = 56,700 ÷ 27,000 = 2.10

6. C
Solution:
Profit or loss plus After tax interest expense on
convertible bonds  
Diluted Weighted average number of outstanding ordinary
EPS
=
shares plus Incremental shares arising from the
assumed conversion or exercise of dilutive potential
ordinary shares  
Numerator on Diluted EPS = 900,000 + 0 = 900,000

7. C
Solution:
(600,000 x 600,00
Jan. 1, 20x3 Outstanding shares 12/12) 0
135,00
Apr. 1, 20x3 Additional shares issued (180,000 x 9/12) 0
(150,000 x 150,00
Incremental shares from conv. bonds 12/12) 0
Weighted average outstanding 885,00
shares 0

8. B
Solution:
Profit or loss plus After tax interest expense on
convertible bonds  
Diluted
EPS
= Weighted average number of outstanding ordinary
shares plus Incremental shares arising from the
assumed conversion or exercise of dilutive potential  
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 ordinary shares
Diluted 840,000 + 0  
EPS
=
200,000 + (20,000 x 5)  
Diluted EPS = 840,000 ÷ 300,000 = 2.80

9. D
Solution:
Profit or loss plus After tax interest expense on
convertible bonds  
Diluted Weighted average number of outstanding ordinary
EPS
=
shares plus Incremental shares arising from the
assumed conversion or exercise of dilutive potential
ordinary shares  
Diluted 1,000 + (10,000 x 4% x 50%)  
EPS
=
1,000 + 1,000  
Diluted EPS = 1,200 ÷ 2,000 = 0.60

10. B
Solution:
Profit or loss plus After tax interest expense on
convertible bonds  
Diluted Weighted average number of outstanding ordinary
EPS
=
shares plus Incremental shares arising from the
assumed conversion or exercise of dilutive potential
ordinary shares  
Diluted 35,000 + (7,000 x 70%)  
EPS
=
10,000 + (20 x 200)  
Diluted EPS = 39,900 ÷ 14,000 = 2.85

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