Exercise Session 7

(maximum 45 minutes)
Question A

True of False. If the answer is false, explain the right answer.

1. When a company has a simple capital structure, it must report both basic and diluted earnings
per share.
2. In computing diluted earnings per share, share options are considered dilutive when their
option price is more or less than the market price.

Question B

Multiple-Choice. Write the right answer.

1. What effect will the sale of treasury shares have on shareholders' equity and earnings per
share, respectively?
A. Decrease and no effect
B. Increase and no effect
C. Decrease and increase
D. Increase and decrease
2. In determining diluted earnings per share, dividends on nonconvertible noncumulative
preference shares should be…
A. disregarded.
B. added back to net income whether declared or not.
C. deducted from net income only if declared.
D. deducted from net income whether declared or not.
3. When computing diluted earnings per share, share option are…
A. ignored.
B. assumed exercised only if they are dilutive.
C. assumed exercised only if they are antidilutive.
D. always assumed to be exercised since they are always dilutive

Question C

Answer the questions with your supporting calculations

1. At December 31, 2022 and 2021, Miley Corp. had 180,000 ordinary shares and 10,000 shares
of 5%, €100 par value cumulative preference shares outstanding. No dividends were declared
on either the preference or ordinary shares in 2022 or 2021. Net income for 2022 was
€400,000. For 2022, earnings per share amounted to…
2. Dunbar Company had 400,000 ordinary shares outstanding during the year 2022. In addition,
at December 31, 2022, 90,000 shares were issuable upon exercise of executive share options
which require a €40 cash payment upon exercise (options granted in 2020). The average
market price during 2022 was €50. Compute the number of shares to be used in determining
diluted earnings per share for 2022!
3. On January 2, 2022, Love Co. issued at par $2,000,000 of 7% convertible bonds. Each $1,000
bond is convertible into 20 ordinary shares. No bonds were converted during 2022. Love had
200,000 ordinary shares outstanding during 2022. Love’s 2022 net income was $600,000 and
the income tax rate was 30%. Love’s basic and diluted earnings per share for 2022 would be…

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