1 LO 7 Compute earnings per share in a complex capital structure. Dirac Enterprises Example (Solution 1) Compute basic & diluted earnings per share for Calculation of Net Income

2 LO 7 Compute earnings per share in a complex capital structure. Dirac Enterprises Example (solution 2) (a) Compute basic & diluted earnings per share for When calculating Diluted EPS, begin with Basis EPS. Net income = $2,580 Weighted average shares = 2,000 = $1.29 Basic EPS

3 LO 7 Compute earnings per share in a complex capital structure. Dirac Enterprises Example (Solution 3) (a) Compute basic & diluted earnings per share for When calculating Diluted EPS, begin with Basis EPS. $2,580 2,000 = $.68 Diluted EPS + $4,800 (1 -.40) 6,000 Basic EPS = 1.29 $5,460 8,000 = Effect on EPS =.48 + =

4 Dirac Enterprises SOLUTION (a) (a) Compute basic & diluted earnings per share for 2007.

5 LO 7 Compute earnings per share in a complex capital structure. Dirac Enterprises Example – Part b Calculation of Net Income (b) Assume bonds were issued on Sept. 1, 2007.$4,5002,000 = $2.25 Basic EPS

6 LO 7 Compute earnings per share in a complex capital structure. Dirac Enterprises Example - b (b) Assume bonds were issued on Sept. 1, When calculating Diluted EPS, begin with Basis EPS. = $1.37 $1,600 (1 -.40) 6,000 x 4/12 yr. $5,460 4,000 = Effect on EPS =.48 $4,500 2,000 Diluted EPS Basic EPS = =

7 Dirac Enterprises Example – Solution b (b) Compute basic & diluted EPS for 2007 if bonds issued 9/1/07

8 Supporting Computations Interest Expense 60 bonds total, $1000 face value = $60,000 outstanding first half of year at 8% * 6/12 = $2,400 interest 40 bonds second half of year = $40,000 * 8% * ½ = $1,600 interest for total of $4,000 interest for year Therefore, net income = $3,060

9 Supporting Computations 60 bonds * 100 = 6,000 shares if converted * ½ year = 3,000 shares 40 bonds * 100 = 4,000 shares if converted * ½ year = 2,000 shares Weighted average shares related to convertible bonds = 5,000 shares

10 Dirac Enterprises Example – Solution c (c) Compute basic & diluted EPS for 2007 if bonds issued 1/1/07 and 20 were converted on 7/1/07.

11 LO 7 Compute earnings per share in a complex capital structure. Dancer Co. Example (similar to P16-7) (a) Compute basic earnings per share for When calculating Diluted EPS, begin with Basic EPS. Net income $1,500,000 – Pfd. Div. $180,000* Weighted average shares = 600,000 = $2.20 Basic EPS * 30,000 shares x $100 par x 6% = $180,000 dividend

12 LO 7 Compute earnings per share in a complex capital structure. Dancer Co. Example (similar to P16-7) When calculating Diluted EPS, begin with Basic EPS. 600,000 = $2.00 Diluted EPS + $180,000 Basic EPS = 2.20 = Effect on EPS = 1.20 (b) Compute diluted earnings per share for $1,500,000 – $180, ,000* $1,500, ,000 *(30,000 x 5) + =

13 LO 7 Compute earnings per share in a complex capital structure. Dancer Co. Example – (c) 600,000 = $2.27 Diluted EPS + $180,000 Basic EPS = 2.20 = Effect on EPS = 3.00 VARIATION (c) Compute diluted earnings per share for 2007 assuming each share of preferred is convertible into 2 shares of common stock. $1,500,000 – $180,000 60,000* $1,500, ,000 *(30,000 x 3) + =

14 Dancer Co. Example – (c) SOLUTION 600,000 = $2.20 Diluted EPS + $180,000 Basic EPS = 2.20 = Effect on EPS = 3.00 $1,500,000 – $180,000 60,000* $1,320, ,000 *(30,000 x 3) Antidilutive Basic = Diluted EPS (c) Compute diluted earnings per share for 2007 assuming each share of preferred is convertible into 2 shares of common stock. = +

15 Venzuela Co. Example (Stock Options) (a) Compute basic and diluted EPS for Treasury-Stock Method ÷ 1,000 shares optioned * $20 - $6 $20 = 700 Short-cut formula:

16 Venzuela Co. (a) Stock Options $50,000 10,000 = $5.00 Basic EPS $50,000 10,000 = $50,000 10,000 = $4.67 Diluted EPS+ 700 Basic EPS = 5.00 $50,000 10,700 = Options =

17 Venzuela Co. Example (Stock Options) Treasury-Stock Method ÷ (b) Compute diluted earnings per share assuming the 1,000 options were issued on October 1, x

18 Venzuela Co. Example (Stock Options) (b) Compute diluted earnings per share assuming the 1,000 options were issued on October 1, $50,000 10,000 = $4.91 Diluted EPS Basic EPS = 5.00 $50,000 10,175 = Options

19 Wilke Corp Example Weighted-Average Number of Shares

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