Use the following to answer questions 21-25: 21-25.

Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase. Terms: A. Antidilutive security B. Basic EPS C. Convertible bonds D. Dividend payout ratio E. Earnings available to common shareholders F. Issuance of new shares G. Multiple convertible securities H. Options, rights, and warrants I. Preferred dividends J. Preferred dividends Phrases: 21. ____ Need to be ranked high to low in terms of dilutive effect. 22. ____ No dilution considered. 23. ____ Tends to be low for growth companies. 24. ____ The numerator in the EPS formula. 25. ____ The treasury stock method is used. Answer: 21-G; 22-B; 23-D; 24-E; 25-H Use the following to answer questions 87-88: During 2006, Falwell Inc. had 500,000 shares of common stock and 50,000 shares of 6% cumulative preferred stock outstanding. The preferred stock has a par value of $100 per share. Falwell did not declare or pay any dividends during 2006. Falwell's net income for the year ended December 31, 2006, was $2.5 million. The income tax rate is 40%. Falwell granted 10,000 stock options to its executives on January 1 of this year. Each option gives its holder the right to buy 20 shares of common stock at an exercise price of $29 per share. The market price of the common stock averaged $30 per share during 2006, and the price on 12/31/06 was $33. 87. What is Falwell's basic earnings per share for 2006, rounded to the nearest cent? A) $3.14 B) $4.40 C) $5.00 D) None of the above is correct. Answer: B Rationale:

net income $2,500,000

preferred dividends - (50,000 x $100 x 6%) $2,200,000 500,000 shares = $4.40/share

= 500,000 common shares

88. What is Falwell's diluted earnings per share for 2006, rounded to the nearest cent? A) $3.14 B) $4.90 C) $4.34 D) Cannot determine from the given information. Answer: C Rationale: The computation ($ in 000's) is as follows: net preferred income $2,500,000 dividends - (50,000 x $100 x 6%) $2,200,000 506,667 shares = $4.34/share

= 500,000 + 6,667 * common shares net shares added from on 1/1/06 conversion of options

*10,000 options x 20 shares/option = 200,000 shares; Proceeds = 200,000 x $29 = $5,800,000 $5,800,000 / $30 per share = 193,333 shares of treasury stock Net shares added = 200,000 - 193,444 = 6,667 43. ABC declared and paid cash dividends in January of the current year to its common shareholders. The dividend: A) Will be added to the numerator of the earnings per share fraction for the current year. B) Will be added to the denominator of the earnings per share fraction for the current year. C) Will be subtracted from the numerator of the earnings per share fraction for the current year. D) Has no effect on the earnings per share for the coming year. Answer: D 45. When a company's only potential common shares are convertible bonds: A) Diluted EPS will be greater if the bonds are actually converted than if they are not converted. B) Diluted EPS will be smaller if the bonds are actually converted than if the bonds are not converted.

C) Diluted EPS will be the same whether or not the bonds are converted. D) The effect of conversion on diluted EPS cannot be determined without additional information. Answer: C 49.When computing earnings per share, cumulative preferred dividends not declared should be: A) Deducted from earnings for the year. B) Deducted, net of tax effect, from earnings for the year. C) Added to earnings for the year. D) Ignored. Answer: A 51.Which of the following is a correct statement concerning earnings per share? A) Earnings per share can never be a negative number. B) Earnings per share must be reported for all corporations. C) If a company has an extraordinary loss, at least two EPS amounts must be reported. D) Reported earnings per share is the result of dividing weighted-average shares by net income. Answer: C 56.When computing diluted earnings per share, stock options: A) Are included if they are antidilutive. B) Should be ignored. C) Are included if they are dilutive. D) Increase the numerator while not affecting the denominator. Answer: C 57. Basic and diluted earnings per share data are required to be reported: A) In footnotes to the financial statements. B) Only if they add to the relevance of the income statement. C) In the summary section of the annual report. D) On the face of the income statement. Answer: D 58.Which of the following will require a recalculation of weighted-average shares outstanding for all years presented? A) Stock dividends and stock splits. B) Stock dividends but not stock splits. C) Stock splits but not stock dividends. D) Stock rights. Answer: A 59. All other things equal, what is the effect on earnings per share when a corporation acquires shares of its own stock on the open market? A) Decrease.

B) No effect if the shares are held as treasury shares. C) Increase only if the shares are considered to be retired. D) Increase. Answer: D 60. If a stock dividend were distributed, when calculating the current year's EPS, the shares distributed are treated as having been issued: A) At the end of the year. B) At the beginning of the year. C) On the declaration date. D) On the date of distribution. Answer: B 61.If a stock split occurred, when calculating the current year's EPS, the shares are treated as issued: A) At the end of the year. B) On the first day of the next fiscal year. C) At the beginning of the year. D) On the date of distribution. Answer: C 69.Stock options do not affect the calculation of: A) Diluted EPS. B) Weighted-average common shares. C) The denominator in the diluted EPS fraction. D) Basic EPS. Answer: D 70. The calculation of diluted earnings per share assumes that stock options were exercised and that the proceeds were used to: A) Buy common stock as an investment. B) Retire preferred stock. C) Buy treasury stock. D) Increase net income. Answer: C 71. The calculation of diluted earnings per share assumes that stock options were exercised and that the proceeds were used to buy treasury stock at: A) The end-of-year market price. B) The average market price during the period. C) The purchase price stated on the options. D) The stock's par value. Answer: B 72. When we assume conversion of convertible bonds, the numerator is increased by:

A) B) C) D)

The amount of after-tax interest. The gross amount of interest. The weighted-average interest. The amount of cash paid during the current year for interest.

Answer: A 74.When we take into account the dilutive effect of convertible securities in the calculation of EPS, the method used is called the: A) Treasury stock method. B) If converted method. C) Optional method. D) Dilution method. Answer: B 75. Nonconvertible bonds affect the calculation of: A) Basic earnings per share. B) Diluted earnings per share. C) Both A and C. D) None of the above is correct. Answer: D 76. A simple capital structure might include: A) Stock rights. B) Convertible bonds. C) Nonconvertible preferred stock. D) Stock purchase warrants. Answer: C 100.On December 31, 2005, Albacore Company had 300,000 shares of common stock issued and outstanding. Albacore issued a 10% stock dividend on June 30, 2006. On September 30, 2006, 12,000 shares of common stock were reacquired as treasury stock. What is the appropriate number of shares to be used in the basic earnings per share computation for 2006? A) 303,000. B) 342,000. C) 312,000. D) 327,000. Answer: D Rationale: (300,000 x 1.10) (12,000 x 3/12) = 327,000 101. On December 31, 2005, Beta Company had 300,000 shares of common stock issued and outstanding. Beta issued a 5% stock dividend on June 30, 2006. On September 30, 2006, 40,000 shares of common stock were reacquired as treasury stock. What is the appropriate number of shares to be used in the basic earnings per share computation for 2006? A) 315,000. B) 307,500.

C) 305,000. D) 267,500. Answer: C Rationale: (300,000 x 1.05) (40,000 x 3/12) = 305,000 103.On December 31, 2005, the Frisbee Company had 250,000 shares of common stock issued and outstanding. On March 31, 2006, the company sold 50,000 additional shares for cash. Frisbee's net income for the year ended December 31, 2006 was $700,000. During 2006, Frisbee declared and paid $80,000 in cash dividends on its nonconvertible preferred stock. What is the 2006 basic earnings per share? A) $2.16. B) $3.50. C) $3.10. D) $2.80. Answer: A Rationale: $700,000 $80,000 $620,000 = = $2.16 250,000 + (50,000 x 9/12) 287,500 105.Getaway Travel Company reported net income for 2006 in the amount of $50,000. During 2006, Getaway declared and paid $2,000 in cash dividends on its nonconvertible preferred stock. Getaway also paid $10,000 cash dividends on its common stock. Getaway had 40,000 common shares outstanding from January 1 until 10,000 new shares were sold for cash on July 1, 2006. A 2-for-1 stock split was granted on July 5, 2006. What is the 2006 basic earnings per share? A) $.42. B) $.47. C) $.53. D) $.56. Answer: C Rationale: $50,000 $2,000 $48,000 = = $.53 (40,000 x 2) + (10,000 x 6/12 x 2) 90,000 110.At December 31, 2006, Hansen Corporation had 50,000 shares of common stock and 5,000 shares of 6%, $100 par cumulative preferred stock outstanding. No dividends were declared or paid in 2006. Net income was reported as $200,000. What is basic EPS? A) $4.00. B) $3.40. C) $3.64. D) $4.02. Answer: B Rationale: Learning Objective: 8 Level of Learning: 3

$200 ,000 30 ,000 $170 ,000 = = $3.40 50 ,000 50 ,000

119.During the current year, High Corporation had 3 million shares of common stock outstanding. Five thousand, $1,000, 6% convertible bonds were issued at face amount at the beginning of the year. High reported income before tax of $4 million and net income of $2.4 million for the year. Each bond is convertible into ten shares of common. What is diluted EPS? A) $.85. B) $.86. C) $.80. D) $.79. Answer: A Learning Objective: 10 Level of Learning: 3 Rationale: $2,400,000 + [$300,000 x (1 - 40%*)] $2,580,000 = = $.85 3,000,000 + (5,000 x 10) 3,050,000 131.Nagy Industries reported a net income of $619,369 on December 31, 2006. At the beginning of the year, the company had 500,000 common shares outstanding. On April 1, the company sold 27,000 shares for cash. On August 31, the company issued 48,000 additional shares as part of a merger. On December 1, 2006, the company declared and issued a 10% stock dividend. Required: Compute Nagy's net income that would produce a basic EPS of $2.00 per share for 2006. Answer: (500,000 x 1.10) + (27,000 x 9/12 x 1.10) + (48,000 x 4/12 x 1.10) = 589,875 weightedaverage shares X/589,875 = $2.00 EPS X = $1,179,750 137. On January 1, 2006, Shamu Corporation had 100,000 shares of common stock outstanding. The following transactions occurred during 2006: March 1: September 30: December 1: December 31: Reacquired 3,000 shares, accounted for as treasury stock. Sold all the treasury shares. Sold 12,000 new shares for cash. Reported a net income of $198,500.

The following transactions occurred during 2007: January 10: December 31: Declared and issued a 25% stock dividend. Reported a net income of $268,800.

Required: Calculate Shamu's basic earnings per share for both years for presentation in comparative financial statements that will be prepared at the end of 2006. Answer:

2006 EPS* 2006:

$198 ,500 = $1. [(100 ,000 1.25 ) (3,000 10 / 12 1.25 ) + (3,000 3 / 12 1.25 ) + (12 ,000 1 / 12 1.25 )]

2007:
$268,800 = $1.92 (100,000 3,000 + 3,000 + 12,000) x 1.25

*Since comparative financial statements are being reported in 2007, EPS for 2006 must be recalculated to reflect the stock dividend. 145. XYZ Company had 200,000 shares of common stock outstanding on December 31, 2005. On July 1, 2006, XYZ issued an additional 50,000 shares for cash. On January 1, 2006, XYZ issued 20,000 shares of convertible preferred stock. The preferred stock had a par value of $100 per share and paid a 5% dividend. Each share of preferred stock is convertible into 8 shares of common. During 2006, XYZ paid the regular annual dividend on the preferred and common stock. Net income for the year was $300,000. Required: Calculate XYZ's basic and diluted earnings per share for 2006. Answer: Basic [$300,000 - ($100 x 5% x 20,000)]/[(200,000 + (50,000 x 6/12)] = $.89 EPS Diluted $300,000 /[(200,000 + (50,000 x 6/12) + (20,000 x 8)] = $.78 EPS