CHAPTER 7

EARNINGS PER SHARE

PROBLEMS

7-1. Case A (SUPERIOR, INC.)

600,000 x 120% 720,000

60,000 x 3/12 (15,000)
705,000
No potential ordinary shares.

Case B (WHITE, INCORPORATED)

For BEPS
40,000,000 x 12/12 40,000,000
5,000,000 x 9/12 3,750,000
1,000,000 x 6/12 500,000
44,250,000
For DEPS
WA number for BEPS 44,250,000
Potential ordinary shares (10,000 x 10 x 3/12) 25,000
44,275,000

Case C (LEFTON, INC.)

For BEPS
600,000 x 12/12 600,000
180,000 x 9/12 135,000
735,000
For DEPS
WA number for BEPS 735,000
Potential ordinary shares (5,000 x 5) 25,000
760,000

Case D (BRAVE COMPANY)

For BEPS
30,000 x 12/12 30,000
2,000 x 3/12 500
30,500

For DEPS
WA number for BEPS 30,500
Potential ordinary shares
3,000 x 7/25 x 9/12 630
1,000 x 7/25 x 3/12 70
31,200

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Chapter 7 – Earnings Per Share

7-2. (MURDOCK COMPANY)

Numerator = P525,000 – P300,000 = P225,000

Denominator
150,000 x 12/12 150,000
30,000 x 9/12 22,500
172,500

BEPS = 225,000 / 172,500 = P1.30

7-3. Case A (WORLEY COMPANY)

BEPS = P2,500,000 / 50,000 = P50.00

DEPS = P2,514,000 / 55,000 = P45.71
Numerator for DEPS = P2,500,000 + (500,000 x 4% x 70%) = P2,514,000
Denominator for DEPS = 50,000 + 5,000 =55,000

Case B (RICHARD WHOLESALERS)

BEPS = P40,000/ 50,000 P0.80

DEPS = P40,000/ 50,000 P0.80

Note: The convertible preference is antidilutive as P60,000 avoidable dividends

divided by 10,000 shares is P6, which is more than P0.80 BEPS ; hence, the
convertible preference is ignored in the computation of DEPS.

Case C (ROBERTS COMPANY)

Weighted average # of shares

300,000 x 12/12 300,000
300,000 x 4/12 100,000
100,000 x 3/12 25,000
425,000
BEPS = P6,000,000 / 425,000 P14.12
DEPS = P6,980,000 / 600,000 P11.63
Avoidable interest
10M x 8% x 70% P 560,000
10M x 8% x 9/12 x 70% 420,000
P 980,000

Numerator = P6M + P980,000 P6,980,000

Denominator:
For BEPS 425,000
100,000 x 9/12 75,000
100,000 x 12/12 100,000
600,000

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Chapter 7 – Earnings Per Share

7-4. Case A (KISSES COMPANY)

(For both basic and diluted earnings per share)

50,000 x 12/12 x 1.2 x 2 120,000

20,000 x 11/12 x 1.2 x 2 44,000
15,000 x 8/12 x 1.2 x 2 (24,000)
10,000 x 4/12 x 2 6,667
Weighted average no. of shares 146,667

Case B (NESTLE COMPANY)

(For both basic and diluted earnings per share)

Work back to find beginning outstanding shares

585,900/1.80 = 325,500/1.05 = 310,000 – 25,000 = 285,000/3 = 95,000
95,000 + 5,000 – 20,000 = 80,000 shares
80,000 x 3 x 1.05 x 12/12 252,000
20,000 x 3 x 1.05 x 11/12 57,750
5,000 x 3 x 1.05 x 9/12 (11,812)
25,000 x 1.05 x 6/12 13,125
Weighted average no. of shares 311,063

Case C (FERRERO COMPANY)

For basic EPS

2016
200,000 x 1.10 x 2 x 12/12 440,000
125,000 x 1.10 x 2 x 9/12 206,250
8,000 x 2 x 3/12 __4,000
650,250
2017
325,000 x 1.10 = 357,500+8,000=365,500 shares, beginning
365,500 x 2 x 12/12 731,000
80,000 x 3/12 20,000
751,000

For diluted EPS

2016
For basic EPS 650,250
125,000 x 1.10 x 2 x 3/12 68,750
125,000 x 1.10 x 2 275,000
8,000 x 5
25 x 1.10 x 2 x 9/12 2,640
996,640
2017
For basic EPS 751,000
125,000 x 1.10 x 2 275,000
1,026,000

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Chapter 7 – Earnings Per Share

7-5. (BAY CORPORATION)

(a) Basic EPS

180,000 – (2,000 x 100 x 4%) = 172,000 = 0.86
200,000 200,000

(b) Diluted EPS

180,000 = 180,000 = 0.857
200,000+(2,000 x5) 210,000

(c) Basic EPS

180,000 – (2,000 x 100 x 12%) = 156,000 = 0.78
200,000 200,000

Diluted EPS (same as BEPS) = 0.78

Preference share is considered to be antidilutive as shown below:

180,000 = 0.857 (considered antidilutive; only a single presentation
210,000 of EPS is reported in the financial statements)
(OR 24,000/10,000 shares = 2.40 which is greater than the basic EPS

7-6. (COSMIC, INC.)

Basic EPS
376,950 = 376,950 = 31.41
10,000 + (4,000 x 6/12) 12,000

Diluted EPS
376,950 + (70,000 x .70) = 425,950 = 30.43
12,000 + (4,000 x 6/12) 14,000

7-7. (LASER COMPANY)

a. Basic EPS
156,700 = 156,700 = 5.11
30,000 + (2,000 x 4/12) 30,667

Diluted EPS
156,700 = 4.60
34,080*
For basic EPS 30,667
6,000 x (25-9) x 8/12 2,560
25
4,000 x (25-9) x 4/12 853
25
34,080

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Chapter 7 – Earnings Per Share

b. Basic EPS
156,700 = 156,700 = 4.90
30,000 + (6,000 x 4/12) 32,000

Diluted EPS
156,700 = 4.53
34,560
For BEPS 32,000
6,000 x (25-9)
25 x 8/12 2,560
34,560

7-8. (CATHERINE INVESTMENT COMPANY)

Increase in
earnings
attributable to Earnings per
ordinary Increase in number of ordinary incremental
shareholders shares share
Options Nil 100,000 (20-15) = 25,000 Nil
20
Convertible P1,250,000 x 8.5% 25,000 x 10 P0.425
preference = P106,250 = 250,000
shares
7% convertible P5,000,000 x 7% x 5,000 x 50 = P0.98
bonds 70%= P245,000 250,000

The sequence to include potential ordinary shares is as follows

(1) options
(2) convertible preference shares
(3) convertible bonds

Basic earnings per share =(P1,500,000 – P106,250) / 1,000,000 shares = P1.39

When only options are considered, the dilutive earnings per share is
P1,500,000 - P106,250 = P 1.36
1,000,000 + 25,000
When convertible preference shares are then considered, the dilutive earnings per share is
______P1,500,000____ = P1.18 thus, the convertible preference is dilutive.
1,025,000 + 250,000
When 7% convertible bonds are also considered, the dilutive earnings per share is
P1,500,000 + 245,000 = P1.14 ; thus, the convertible bonds are dilutive
1,275,000 + 250,000
The dilutive earnings per share is P1.14
OR (1.5M + 245,000)/(1M + 25,000 + 250,000 + 250,000) = 1.14

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Chapter 7 – Earnings Per Share

MULTIPLE CHOICE QUESTIONS

Theory
MC1 C MC7 D MC13 C
MC2 C MC8 B MC14 A
MC3 B MC9 C MC15 B
MC4 D MC10 C MC16 C
MC5 C MC11 C MC17 B
MC6 B MC12 C MC18 A

Problems
MC19 C 1,000,000 – (20,000 x 100 x 5%) = 900,000/200,000 = 4.50
MC20 C 300,000 – 30,000 = 270,000; 270,000/30,000+(6,000x6/12) = 8.18
MC21 B 290,100 – (30,000 x 4) = 170,100/60,000+(31,500x 8/12) = 2.10
MC22 B 1,100,000 = 1,100,000 = 4.82
(200,000 x 1.10) + 40,000 x 5 228,000
25
MC23 D 250,000 + (60,000x3/12) + 50,000 = 315,000
MC24 B 1,000,000 – (5% x 10,000 x 100)/100,000 = 9.50
MC25 D 2,500,000 + (500,000 x 9/12) + (250,000 x 6/12) = 3,000,000
3,000,000 + (5,000 x 40 x 3/12) = 3,050,000
MC26 B 600,000 – (20,000 x 3) = 540,000/200,000 = 2.70
MC27 C 600,000 + (1,000,000 x 10% x 70%) = 2.35
200,000 + 40,000 + (1,000 x 45)
MC28 D 30,000 x (25-20)/25 = 6,000
MC29 B 495,000/4.95 = 100,000 shares; 2009: 495,000/(100,000 x 1.10) = 4.50
2010: 825,000/(110,000 + (12,000 x 4/12) = 7.24
MC30 B 850,000/130,000 = 6.54
MC31 B 150,000 + (15,000 x 6/12) + (15,000 x 2/12) = 160,000
MC32 B (770,000 – 140,000) / 160,000 = 3.94
MC33 A 770,000/(160,000+40,000) = 3.85
MC34 B 100,000 + (10,000 x 3/12) = 102,500
MC35 C (177,500 – 20,000) / 102,500 = 1.54
MC36 B 177,500 / (102,500 + 20,000) = P1.45
MC37 C (100,000 x 2 x 120%) + (30,000 x 120% x 7/12) = 261,000
MC38 A Numerator: 2,000,000 – (1,000,000 x 7.5%) = 1,925,000
Denominator: 100,000 + (60,000 x 4/12) = 120,000
BEPS = 1,925,000/120,000 = P16.04
MC39 D 250,000 + (6,000 x 40 x 3/12) = 310,000; 4M/310,000 = 12.90
MC40 B 4M + (6M x 10% x 9/12 x 70%) = 4.315,000
310,000 + (6,000 x 40 x 9/12) = 490,000
4,315,000/490,000 = 8.81
MC41 C 40,000 + (3,000 x 4/12) = 41,000; 296,500/41,000 = 7.23
MC42 D 41,000+ (1,000 x 10/25) + (3,000 x 10/25 x 8/12) = 42,200
296,500/42,200 = 7.03
MC43 A (15,000 x 3/12) + (12,500 x 2/12) + (17,000 x 7/12) = 15,750
15,750 + (6,000 x 5/30) = 16,750
MC44 A 2.8M/200,000 = 14
MC45 A Options: dilutive; option price (30) is lower than the ave. market price (48)
Preference sh: (20,000 x 100 x 12%)/(20,000 x 2) = 6
Bonds: (10% x 2M x 70%)/ 40,000 = 3.50
Sequence: Options, Bonds, Preference shares

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