Name: __________________________ Problem chapter 16
1. Basic and diluted EPS.
The following information was taken from the books and records of Teller, Inc.:
Net Income
$800,000
Capital Structure: Convertible bonds 6% $30,000 worth. Each $500 bond can be converted into
40 shares of common stock.
The common stock $10 par started the year with 60,000 shares outstanding (issued 5 years ago).
On April 1 there was a repurchase of 4,000 shares. On July 1, reissued 6,000 shares of treasury
stock. On November 1 there was a 2 for 1 split.
At the end of the year there were stock warrants outstanding (for the whole year) to purchase
25,000 shares of stock for $20 per share. The average market price for the stock is $40.
The corporate income tax rate averages 40%.
Instructions
Compute basic and diluted earnings per share.
Change in shares
1-Jan
1-Apr
1-Jul
1-Nov
shares outstanding
60,000
56,000
62,000
124,000
-4,000
6,000
1/2 split
transaction of year
3/12
3/12
4/12
2/12
Basic EPS = NI/WA = 800,000/120,000 = 6.67
Warrants
25,000*20/40 = 12,500
25,000-12,500= 12,500
Diluted EPS
800,000
+ 30,000*0.06*(1-0.4) = 801,080/134,900 = 5.94
120,000 +12,500 + 30,000/500*40
6.04
>
0.45
split
2
2
2
WA
30000
28000
41333
20667
120000