19-1 diluted earnings per share—complex capital structure chapter 19 illustrated solution: problem...
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19-1
Diluted EarningsPer Share—Complex
Capital Structure
Chapter 19Illustrated Solution: Problem 19-28Illustrated Solution: Problem 19-28
19-2
Weighted Average Shares OutstandingWeighted Average Shares Outstanding
Weighted average shares outstanding are computed by multiplying the number of shares outstanding for each month by 1/12 and adding up the total for twelve months.
19-3
Weighted Average Shares OutstandingWeighted Average Shares Outstanding
Weighted average shares outstanding are computed by multiplying the number of shares outstanding for each month by 1/12 and adding up the total for twelve months.
Weighted-average common shares outstanding:
Jan. 1 to Sept. 1—280,000 x 8/12……….. 186,667
Sept. 1 to Dec. 31—336,000 x 4/12……… 112,000
298,667
19-4
Net Income Applicable to Common StockNet Income Applicable to Common Stock
Net income applicable to common stock is computed by adjusting the net income reported on the income statement by any dividends paid on preferred stock.
19-5
Net Income Applicable to Common StockNet Income Applicable to Common Stock
Net income applicable to common stock is computed by adjusting the net income reported on the income statement by any dividends paid on preferred stock.
Net income……………………………………………… $860,000
Less: Dividends on preferred stock (10,000 x $5)…. 50,000
Net income applicable to common stock……………. $810,000
19-6
Basic Earnings Per ShareBasic Earnings Per Share
Basic Earnings Per Share is computed by dividing the net income applicable to common stock by the weighted average of common shares outstanding for the period.
19-7
Basic Earnings Per ShareBasic Earnings Per Share
Basic Earnings Per Share is computed by dividing the net income applicable to common stock by the weighted average of common shares outstanding for the period.
Net income applicable to common stock……………… $810,000
Weighted-average shares outstanding……………….. $298,667
Basic EPS ($810,000 298,667)……………………… $2.71
19-8
Dilutive SecuritiesDilutive Securities
A convertible security is dilutive if the incremental earnings per share that would result from conversion to common stock is lower than the basic earnings per share without conversion.
19-9
Convertible Bonds--DilutiveConvertible Bonds--Dilutive
Interest, net of tax, per $1,000 bond ($1,000 x .10 x .70)…….. $70.00
19-10
Convertible Bonds--DilutiveConvertible Bonds--Dilutive
Interest, net of tax, per $1,000 bond ($1,000 x .10 x .70)…….. $70.00
Number of shares…………………………………………………. 40.00
19-11
Convertible Bonds--DilutiveConvertible Bonds--Dilutive
Interest, net of tax, per $1,000 bond ($1,000 x .10 x .70)…….. $70.00
Number of shares…………………………………………………. 40.00
Incremental Earnings Per Share ($70 $40)………………….. $ 1.75
19-12
Convertible Bonds--DilutiveConvertible Bonds--Dilutive
Because the $1.75 incremental EPS is less than the $2.71 basic EPS, the convertible bonds are dilutive. This means that when Diluted EPS is computed, the total shares that would be issued on conversion will be added to the denominator. It also means that the interest expense (net of taxes) that was paid on the bonds will be added to the numerator.
Interest, net of tax, per $1,000 bond ($1,000 x .10 x .70)…….. $70.00
Number of shares…………………………………………………. 40.00
Incremental Earnings Per Share ($70 $40)………………….. $ 1.75
19-13
Net Income for Diluted EPSNet Income for Diluted EPS
Net income for basic EPS……………………………………… $810,000
19-14
Net Income for Diluted EPSNet Income for Diluted EPS
Net income for basic EPS……………………………………… $810,000
Add interest expense net of taxes on convertible bonds($1,000,000 x .10 x .70)……………………………………… 70,000
19-15
Net Income for Diluted EPSNet Income for Diluted EPS
Net income for basic EPS……………………………………… $810,000
Add interest expense net of taxes on convertible bonds($1,000,000 x .10 x .70)……………………………………… 70,000
Net income for diluted EPS……………………………………. $880,000
19-16
The “If Converted” MethodThe “If Converted” Method
Since the options have an option price of $22.50 and the average price for Carrizo’s stock during the year was $36, the options are dilutive.
19-17
The “If Converted” MethodThe “If Converted” Method
Since the options have an option price of $22.50 and the average price for Carrizo’s stock during the year was $36, the options are dilutive.
However, even though the options are for 30,000 shares of common stock, the incremental shares of common stock issued by Carrizo will be less than this number.
19-18
The “If Converted” MethodThe “If Converted” Method
Since the options have an option price of $22.50 and the average price for Carrizo’s stock during the year was $36, the options are dilutive.
However, even though the options are for 30,000 shares of common stock, the incremental shares of common stock issued by Carrizo will be less than this number.
To find the incremental shares to be issued that would be issued if the options were exercised, we assume Carrizo will use the proceeds from the options to repurchase as many shares as possible at the average market price.
19-19
Shares assumed issued on exercise of options……………… 30,000
The “If Converted” MethodThe “If Converted” Method
19-20
Shares assumed issued on exercise of options……………… 30,000
Less: Shares assumed repurchased from proceeds ofoptions (30,000 x $22.50 = $675,000; $675,000 $36average price)………………………………………………… 18,750
The “If Converted” MethodThe “If Converted” Method
19-21
Shares assumed issued on exercise of options……………… 30,000
Less: Shares assumed repurchased from proceeds ofoptions (30,000 x $22.50 = $675,000; $675,000 $36average price)………………………………………………… 18,750
Incremental shares assumed issued on exercise of options ..11,250
The “If Converted” MethodThe “If Converted” Method
19-22
Weighted-average shares outstanding for basic EPS……………………………………………… 298,667
Incremental shares:
Shares assumed to be issued on conversion of bonds……………………………… 40,000
Computation of Diluted EPSComputation of Diluted EPS
19-23
Weighted-average shares outstanding for basic EPS……………………………………………… 298,667
Incremental shares:
Shares assumed to be issued on conversion of bonds……………………………… 40,000
On assumed exercise of options…………………. 30,000
Less: Shares assumed repurchased from proceeds of options………………………………. 18,750 11,250
Shares assumed outstanding for diluted EPS………. 349,917
Computation of Diluted EPSComputation of Diluted EPS
19-24
Weighted-average shares outstanding for basic EPS……………………………………………… 298,667
Incremental shares:
Shares assumed to be issued on conversion of bonds……………………………… 40,000
On assumed exercise of options…………………. 30,000
Less: Shares assumed repurchased from proceeds of options………………………………. 18,750 11,250
Shares assumed outstanding for diluted EPS………. 349,917
Computation of Diluted EPSComputation of Diluted EPS
Net income for diluted EPS ………………………………… $880,000
Shares assumed outstanding for diluted EPS …………… 349,917
Diluted Earnings Per Share ($880,000 $349,917)……… $ 2.51
19-25
End of ProblemEnd of Problem