Exercise 19-11
(amounts in thousands, except per share amount)
netEarnings
income Per Share
$655 $655
———————————————————————— = —— = $.64
900 (1.05)+ 60 (8/12)(1.05)+ 72 (7/12)1,029
sharesnewnew
at Jan. 1sharesshares
___ stock dividend ___
adjustment
Problem 19-10
The options issued in 2004 are not considered when calculating 2006 EPS because the exercise price ($33) is not less than the 2006 average market price of $32 (although they would have been considered when calculating 2004 or 2005 EPS if the average price those years had been more than $33).
The options issued in 2006 do not affect the calculation of 2006 EPS because they were issued at December 31. Options are assumed exercised at the beginning of the year or when granted, whichever is later — when granted, in this case. So, the fraction of the year the shares are assumed outstanding is 0/12, meaning no increase in the weighted-average shares.
The options issued in 2005 are considered exercised for 8,000 shares when calculating 2006 EPS because the exercise price ($24) is less than the 2006 average market price of $32. Treasury shares are assumed repurchased at the average price for diluted EPS:
8,000 shares
x $24 (exercise price)
$192,000
÷ $32 (average market price)
6,000 shares
Problem 19-10 (concluded)
(amounts in thousands, except per share amounts)
Basic EPS
netpreferred
income dividends
$2,100 – $75$2,025
——————————————————————————— = —— = $3.00
600 (1.04)+ 60 (10/12) (1.04) – 2 (6/12) 675
sharesnewshares
at Jan. 1sharesretired
___ stock dividend ___
adjustment
Diluted EPS
netpreferredafter-tax
income dividendsinterest savings
$2,100 – $75+ $80 – 40%($80)$2,073
———————————————————————————— = — = $2.86
600 (1.04)+ 60(10/12) (1.04)– 2 (6/12) + (8 – 6) + 23* + 24** 724
sharesnewsharesexercisecontingentconversion
at Jan. 1sharesretiredof optionssharesof bonds
___ stock dividend ___
adjustment
* The contingently issuable shares are considered issued when calculating diluted EPS because the condition for issuance (Merrill net income > $500,000) currently is being met.
** The bonds are considered converted when calculating diluted EPS: 800 bonds x 30 shares = 24,000 shares upon conversion. Interest = $800,000 x 10% = $80,000.
Problem 19-11
Requirement 1
(amounts in thousands, except per share amount)
Basic EPS:
preferred
net incomedividends
$150 – $77$73
———————————————— = ——— = $1.83
4040
weighted-average
shares
With conversion of preferred stock
(Diluted EPS):
net income
$150 $150
———————————————— = ——— = $2.50
40+ 2060
weighted-averageconversion
sharesof preferred
shares
Since the assumed conversion of the convertible preferred stock causes EPS to increase, it is antidilutiveand therefore ignored when calculating EPS.
Problem 19-11 (concluded)
Requirement 2
Basic EPS:
net income
$150
————————— = $3.75
40
weighted-average
shares
With conversion of bonds:
after-tax
net incomeinterest savings
$150+ $40 – 40% ($40)$174
———————————————— = ——— = $3.87
40+ 545
weighted-averageconversion
sharesof bonds
Since the assumed conversion of the convertible bonds causes EPS to increase, it is antidilutive and therefore ignored when calculating EPS.
Requirement 3
Since the exercise price is less than average market price, the options are not antidilutive and therefore assumed exercised when calculating diluted EPS.
Requirement 4
Since the exercise price is higher than the average market price, the warrants are antidilutive and therefore ignored when calculating diluted EPS.
Requirement 5
The 5,000 shares are added to the denominator when calculating diluted EPS since 2006 net income is higher than the conditional amount. Since only the denominator is increased, the effect is not antidilutive.
Problem 19-12
(amounts in millions, except per share amounts)
Basic EPS
net
income
$560 $560
—————————————————————— = —— = $1.44
400– 30 (4/12)390
sharesnew
at Jan. 1shares
Diluted EPS
netafter-tax*
income interest savings
$560 + $30 – 40% ($30)$578
—————————————————————— = —— = $1.36
400– 30 (4/12)+ 36426
sharesnewconversion
at Jan. 1sharesof bonds
*Interest on the bonds = $300 million x 10% = $30 million. If the bonds were not outstanding, interest expense would have been $30 million lower, and tax expense would have been 40% x $30 million, or $12 million higher, a net after-tax savings of $18 million.
Problem 19-13
(amounts in thousands, except per share amounts)
Basic EPS
netpreferred
income dividends
$650 – $40*$610
—————————————————————————————————— = ——— = $1.37
440+ 16 (3/12) 444
sharesnew
at Jan. 1shares
Diluted EPS
netpreferredpreferred
income dividendsdividends
$650 – $40*+ 40*$650
————————————————————————————————— = ——— = $1.33
440+ 16 (3/12)+ (20 – 15**) + 40 489
sharesnewexerciseconversion
at Jan. 1sharesof optionsof preferred
shares
* 4,000 shares x $100 par x 10% = $40,000
**Assumed purchase of treasury shares
20,000 shares
x $30 (exercise price)
$600,000
÷ $40 (average market price)
15,000 shares
Problem 19-14
(amounts in millions, except per share amounts)
Basic EPS
netpreferred
income dividends
$1,476 – $60* $1,416
——————————————————————————————————————— = ——— = $2.27
600+ 72 (4/12)624
sharesnew
at Jan. 1shares
Diluted EPS
netpreferredafter-tax
income dividendsInterest savings
$1,476 – $60* + $160 - 40% ($160)$1,512
——————————————————————————————————————— = ——— = $2.09
600+ 72 (4/12)+ (60 – 40)**+ 80724
sharesnewexerciseconversion
at Jan. 1sharesof optionsof bonds
*Preferred dividends: 6% x $50 x 20 million shares = $60 million
**Computation of Treasury Shares:
60 millionshares
x $12exercise price
$720 millionproceeds
÷ $18average share price
40 milliontreasury shares