SOL. MAN. Chapter 15 EPS 2021 PDF

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Chapter 15Earnings per SharePROBLEM 1: TRUE OR FALSE1. FALSE2. TRUE3. FALSE – “addition” not “reduction”4. TRUE5. TRUE6. FALSE7. TRUE8. TRUE9. TRUE10PROBLEM 2: MULTIPLE CHOICE – THEORY1. A2. D3. D4. A5. C6. D7. D8. B9. A10PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL1. BSolution:BasicEPS=Profit or loss...

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Page | 1

Chapter 15 Earnings per Share PROBLEM 1: TRUE OR FALSE 1. FALSE 2. TRUE 3. FALSE – “addition” not “reduction” 4. TRUE 5. TRUE 6. FALSE 7. TRUE 8. TRUE 9. TRUE 10. FALSE PROBLEM 2: MULTIPLE CHOICE – THEORY 1. A 2. D 3. D 4. A 5. C 6. D 7. D 8. B 9. A 10. C

Page | 2 PROBLEM 3: MULTIPLE CHOICE – COMPUTATIONAL 1. B Solution: Basi Profit or loss less Preferred dividends Weighted average number of outstanding c = ordinary shares EPS Basi 1,000,000 – (10,000 x 5% x ₱100) c = EPS 100,000 Basic EPS = (1,000,000 – 50,000) ÷ 100,000 = 9.50 2. A Solution: Basi c = EPS

Profit or loss less Preferred dividends Weighted average number of outstanding ordinary shares

Basi 960,000 – 100,000 c = EPS (200,000 x 110%) Basic EPS = 860,000 ÷ 220,000 = 3.91 3. B Date Jan. 1 Apr. 1 July 1

No. of shares

Months outstanding

Weighted average

(a)

(b)

(c) = (a) x (b)

20,000 + 20,000 N/A (effect is on Jan. 1)

12/12 -

6/12 10,000 Weighted average number of ordinary shares 4. C Solution: 1/1/x8 Shares outstanding 2/1/x8 10% share dividend 3/1/x8 Business combination 7/1/x8 Issued for cash

40,000 5,000

(30,000 + 3,000) x 12/12 see effect on Jan. 1 (9,000 x 10/12) (8,000 x 6/12)

45,000

33,0 00 7,5 00 4,0

Page | 3 00 44, 500

Weighted average shares

5. B Solution: The weighted average outstanding shares are computed as follows: Months Outstandi outstandin Weighted ng shares g average Jan. 1, 20x3 May 1, 20x3

Basi c EPS

20,000.00

12/12

20,000

10,500.00

8/12

7,000 27,000

Profit or loss less Preferred dividends =

Weighted average number of outstanding ordinary shares

Basi 96,700 – (10,000 x ₱4) c = EPS 27,000 Basic EPS = 56,700 ÷ 27,000 = 2.10 6. C Solution: Basi c = EPS

Profit or loss less Preferred dividends Weighted average number of outstanding ordinary shares

Basi 10,075,000 – 0 c = 1,625,000(a) EPS Basic EPS = 10,075,000 ÷ 1,625,000 = 6.20 (a)

Jan. 1, 20x3 (500,000 x 110% x 2 x 12/12)  (180,000 x 110% x 2 x 10/12)   (200,000 x 2 x 6/12)

1,100,000 330,000 200,000

Page | 4 (5,000) 1,625,000

   (-60,000 x 1/12) Weighted average outstanding shares

7. D Solution:

Profit Weighted ave. outs. Sh. (200,000 x 3 x 12/12) - (30,000 x 3 x 9/12)

20x2

20x1

350,000

410,00 0

532,500 600,00 0

(200,000 x 3 x 12/12) Basic EPS

0.66

8. B Solution: Fair value of shares selling right-on (given) Less: Value of 1 right (a) Fair value of shares selling ex-right

(a)

Value of 1 right

=

Value of 1 = right Value of 1 right

Adjustm = ent factor

0.68

1.25 (0.05) 1.20

Fair value of share right-on – Subscription price No. of rights needed to purchase one share + 1 1.25 – 0.70 10 + 1 = (0.55 ÷ 11) = 0.05

Fair value of shares selling right-on Fair value of shares selling ex-right

Adjustment factor = 1.25/1.20 or 1.04167

Page | 5

Alternative solution: Using the definition For this solution, we’ll need to assume a value for the number of outstanding shares before the rights issue. Let’s assume 1,000 shares. Aggregate mkt. value of shares before exercise of rts. 1,250

(1,000 sh. x ₱1.25)

Add: Proceeds from exercise of rts. [(1,000 rts. ÷ 10) x ₱0.70]

Total Divide by: Outstanding shares after exercise of rts.

70 1,320 1,100 1.20

[1,000 sh. + (1,000 rts. ÷ 10 rts. per sh.)]

Fair value of shares selling ex-right Adjustment factor = 1.25/1.20 or 1.04167 9. A Fair value of shares selling right-on (given) Less: Value of 1 right (a) Fair value of shares selling ex-right

(a)

Value of 1 right

=

Value of 1 = right Value of 1 right

Adjustm = ent factor

1.40 (0.05) 1.35

Fair value of share right-on – Subscription price No. of rights needed to purchase one share + 1 1.40 – 1.00 7+1 = (0.40 ÷ 8) = 0.05

Fair value of shares selling right-on Fair value of shares selling ex-right

Adjustment factor = 1.40/1.35 Jan. 1: (350,000 x 1.40/1.35 x 3/12)

90,7 41

Page | 6 300, 000 390,74 1

Apr. 1: (400,000(b) x 9/12) Weighted average no. of outstanding ordinary shares (b)

[350,000 before issue + (350,000 rts. ÷ 7)] = 400,000

275,00 0

Profit for the year Divide by: Weighted average no. of outstanding shares Basic earnings per share

390,741 0. 704

10. D Solution: Fair value of shares selling right-on (given) Less: Value of 1 right (a) Fair value of shares selling ex-right

(a)

Value of 1 right

=

Value of 1 = right Value of 1 right

Adjustm = ent factor

160 (10) 150

Fair value of share right-on – Subscription price No. of rights needed to purchase one share + 1 160 – 100 5+1 = (60 ÷ 6) = 10

Fair value of shares selling right-on Fair value of shares selling ex-right

Adjustment factor = 160/150 Jan. 1: (300,000 x 160/150 x 3/12)

80,0

Page | 7

(b)

Apr. 1: (360,000

00 270, 000

x 9/12)

Weighted average no. of outstanding ordinary shares (b)

350,00

[300,000 before issue + (300,000 rts. ÷ 5)] = 360,000

6,000, 000

Profit for the year Divide by: Weighted average no. of outstanding shares Basic earnings per share

350,000 17. 14

11. C Solution:

Dilute d EPS

=

Profit or loss plus After tax interest expense on convertible bonds Weighted average number of outstanding ordinary shares plus Incremental shares arising from the assumed conversion or exercise of dilutive potential ordinary shares

Numerator on Diluted EPS = 900,000 + 0 = 900,000 12. C Solution: Jan. 1, 20x3 Outstanding shares Apr. 1, 20x3 Additional shares issued Incremental shares from conv. bonds Weighted average outstanding shares 13. D Solution:

(600,000 x 12/12) (180,000 x 9/12) (150,000 x 12/12)

600,0 00 135,0 00 150,0 00 885, 000

Page | 8 Basi c EPS

Profit or loss less Preferred dividends =

Weighted average number of outstanding ordinary shares

Basi 2,400,000 – (6% x 1,000,000) c = EPS 200,000 Basic EPS = 2,340,000 ÷ 200,000 = 11.70

Dilute d EPS

=

Profit or loss plus After tax interest expense on convertible bonds Weighted average number of outstanding ordinary shares plus Incremental shares arising from the assumed conversion or exercise of dilutive potential ordinary shares

Diluted EPS = (2,400,000 + 0) ÷ [200,000 + (50,000 x 2)] Diluted EPS = 2,500,000 ÷ 300,000 = 8.00

14. B Solution:

Dilute d EPS

=

Profit or loss plus After tax interest expense on convertible bonds Weighted average number of outstanding ordinary shares plus Incremental shares arising from the assumed conversion or exercise of dilutive potential ordinary shares

Dilute d EPS

=

840,000 + 0 200,000 + (20,000 x 5)

Diluted EPS = 840,000 ÷ 300,000 = 2.80 15. D Solution:

Page | 9

Dilute d EPS

=

Profit or loss plus After tax interest expense on convertible bonds Weighted average number of outstanding ordinary shares plus Incremental shares arising from the assumed conversion or exercise of dilutive potential ordinary shares

Dilute d EPS

=

1,000 + (10,000 x 4% x 50%) 1,000 + 1,000

Diluted EPS = 1,200 ÷ 2,000 = 0.60 16. B Solution:

Dilute d EPS

=

Dilute d EPS

=

Profit or loss plus After tax interest expense on convertible bonds Weighted average number of outstanding ordinary shares plus Incremental shares arising from the assumed conversion or exercise of dilutive potential ordinary shares 35,000 + (20

x 10,000 face amt. x 7% x 6/12 x 70%) 10,000 + (20 x 200) bonds

Diluted EPS = (35,000 + 4,900) ÷ (10,000 + 4,000) = 2.85 Diluted EPS = 39,900 ÷ 14,000 = 2.85 17. A Solution: Basic EPS = (3.6M profit – 0 preferred dividends) ÷ 280,000 sh. = 12.86 Dilute d EPS

=

Profit (Loss) plus After tax interest expense Weighted average shares plus Incremental shares

Diluted EPS

=

3,600,000 + 0

P a g e | 10 280,000 + 12,500(a) Diluted EPS = 3,600,000 ÷ 292,500 = 12.31 (a)

50,0 00

Option shares Multiply by: Total exercise price

(80 exercise price + 10 fair value of each share option)

Proceeds from assumed exercise of options

90 4,500, 000

Divide by: Average market price

120 37, 500

Treasury shares assumed to have been purchased Option shares Less: Treasury shares assumed to have been purchased Incremental shares

50,00 0 (37,500 ) 12,50 0

18. D Solution: Basic EPS = (285K profit – 0 preferred dividends) ÷ 180,000 sh. = 1.58 Dilute d EPS

=

Profit (Loss) plus After tax interest expense Weighted average shares plus Incremental shares

Diluted EPS

=

285,000 + 0 180,000 + 1,500(a)

Diluted EPS = 285,000 ÷ 181,500 = 1.57 (a)

Option shares Multiply by: Total exercise price Proceeds from assumed exercise of options

15,0 00 20 300,00 0

P a g e | 11

Divide by: Average market price

25 12, 000

Treasury shares assumed to have been purchased Option shares Less: Treasury shares assumed to have been purchased Incremental shares Multiply by: Months outstanding (i.e., July 1 to

15,00 0 (12,000 ) 3,000

Dec. 31)

Weighted average incremental shares

19. D Solution: Basi c = EPS Basi c EPS

6/12 1,500

Profit or loss less Preferred dividends Weighted average number of outstanding ordinary shares

-900,000 – (500,000 x 6%) =

200,000

Basic EPS = (-900,000 - 30,000) ÷ 200,000 Basic EPS = -930,000 ÷ 200,000 = (4.65)

Dilute d EPS

Profit or loss plus After tax interest expense on convertible bonds = Weighted average number of outstanding ordinary shares plus Incremental shares

Dilute d EPS

=

-900,000 + 0 200,000 + (50,000 x 2)

Diluted EPS = -900,000 ÷ 300,000 = (3.00)

The diluted loss per share decreased the basic loss per share (anti-dilutive). Therefore, Party, Inc. shall report only the Basic loss per share.

20. C

P a g e | 12 Solution: Basic earnings per share: Basi Profit or loss less Preferred dividends = Weighted average number of outstanding c ordinary shares EPS Basi c EPS

6,000,000 – (8% x ₱100 par x 100,000 sh.) =

500,000

Basic EPS = (6,000,000 – 800,000) ÷ 500,000 Basic EPS = 5,200,000 ÷ 500,000 = 10.40

Diluted earnings per share: The multiple potential ordinary shares are ranked according to their dilutive effect as follows: Convertible Convertible bonds PS Options Incremental earnings 159,930 800,000 Incremental shares 8,000 20,000 200,000 Incremental EPS 8.00 4.00 Ranking 

1st

3rd

Options: Option shares Multiply by: Exercise price Proceeds from assumed exercise of options Divide by: Average market price

Treasury shares assumed to have been purchased Option shares Less: Treasury shares assumed to have been purchased Incremental shares 

2nd 40,0 00 100 4,000, 000 125 32, 000 40,000 (32,000) 8,000

Convertible bonds: (1,903,927 x 12% x 70% = 159,930); [(2M ÷ 1,000) x 5 = 10,000]

P a g e | 13





Convertible PS: (100,000 sh. x ₱100 par x 6% = 600,000); (100,000 x 2 = 200,000)

Ranking: The Options are ranked 1st because they have the least incremental EPS. The Convertible bonds are ranked last because they have the highest incremental EPS.

Basic EPS Options (1st rank) Diluted EPS #1 Convertible PS

Profit 5,200,0 00 5,200,0 00

Ordinary sh. 500,000 8,000 508,000

800,000 6,000,0 00

200,000

(3rd rank)

159,930

10,000

Diluted EPS #3

6,159,9 30

(2nd rank)

Diluted EPS #2 Convertible bonds

Answers:  Basic EPS = 10.40  Diluted EPS = 8.47

708,000

718,000

EP S 10.4 0 10.2 4

Diluti ve

8.47

Diluti ve

8.58

Antidilutiv e

P a g e | 14 PROBLEM 4: FOR CLASSROOM DISCUSSION 1. Solution: Basi Profit or loss less Preferred dividends c = Weighted average number of outstanding ordinary shares EPS Basic EPS = [500K - (250K x 4%)] ÷ 200,000 sh. = 2.45

2. Solution: Months outstanding

Weighted average

(a)

(b)

(c) = (a) x (b)

660,000* (48,000)

12/12 3/12

660,000 (12,000) 648,000

Date

No. of sh.

1/1/2003 7/1/2003 10/1/2003

* 600,000 x 110% = 660,000

3. Solution:

Profit Weighted ave. outs. sh. (100,000 x 2 x 12/12) + (20,000 x 2 9/12)

2005

2004

410,000

350,00 0

230,000 200,00 0

(100,000 x 2 x 12/12) Basic EPS

1.78

4. Solution: Fair value of shares selling right-on (given) Less: Value of 1 right (a) Fair value of shares selling ex-right

(a)

Value of 1 right

=

1.75

480 ( 30) 450

Fair value of share right-on – Subscription price No. of rights needed to purchase one share + 1

P a g e | 15

Value of 1 = right Value of 1 right

Adjustm ent = factor

480 – 300 5+1 = (180 ÷ 6) = 30

Fair value of shares selling right-on Fair value of shares selling ex-right

Adjustment factor = 480/450 Jan. 1: (400,000 x 480/450 x 9/12) Apr. 1: (480,000

(b)

x 3/12)

Weighted average no. of outstanding ordinary shares (b)

Ordinary shares before the exercise of rights Shares issued on the exercise of rights (400,000 rights ÷ 5 rights needed to purchase one share) Outstanding shares after the exercise of rights

Profit for the year Divide by: Weighted average no. of outstanding shares Basic earnings per share

320, 000 120, 000 440,00 0 400,000 80,000 480,000

8,000,0 00 440,00 0 18. 18

5. Solution:

Dilute d EPS

Profit (Loss) plus After tax interest expense on convertible bonds Weighted average number of outstanding = ordinary shares plus Incremental shares arising from the assumed conversion or exercise of dilutive potential ordinary shares

Diluted EPS

=

840,000 + 0 200,000 + (20,000 x 5)

P a g e | 16

Diluted EPS = 840,000 ÷ 300,000 = 2.80

6. Solution: Profit (Loss) plus After tax interest expense on convertible bonds Dilute Weighted average number of outstanding = d EPS ordinary shares plus Incremental shares arising from the assumed conversion or exercise of dilutive potential ordinary shares 500,000 + (50,000 x 4% x 60%*) Dilute = d EPS 5,000 + 5,000 *60% = 1 – 40% tax rate Diluted EPS = (500,000 + 1,200) ÷ 10,000 Diluted EPS = (501,200 ÷ 10,000) = 50.12

7. Solution: Dilute d EPS

=

Profit (Loss) plus After tax interest expense Weighted average shares plus Incremental shares

Diluted EPS

=

15,000,000 + 0 500,000 + 10,000(a)

Diluted EPS = 15,000,000 ÷ 510,000 = 29.41 (a)

Option shares Multiply by: Total exercise price

(180 exercise price + 20 fair value of each share option)

Proceeds from assumed exercise of options Divide by: Average market price Treasury shares assumed to have been purchased

50,0 00 2 00 10,000, 000 2 50 40, 000

P a g e | 17

Option shares Less: Treasury shares assumed to have been purchased Incremental shares

50,00 0 (40,000 ) 10,00 0

8. Solution:  Concept: If the contract can be settled in ordinary shares or in cash at the entity’s option, it is presumed that the contract will be settled in ordinary shares. Accordingly, the “regular” computations for both basic and diluted EPS will be applied to the problem. The settlement option is simply ignored. Basic EPS = (2M profit – 0 preferred dividends) ÷ 100,000 sh. = 20.00 Dilute d EPS

=

Profit (Loss) plus After tax interest expense Weighted average shares plus Incremental shares

Diluted EPS

=

2,000,000 + 73,482(a) 100,000 + 50,000

Diluted EPS = 1,073,482 ÷ 150,000 = 13.82 (a)



Fair value of bonds without conversion feature: (₱1M x PV of ₱1 @10%, n=3) + (₱120K x PV of an ordinary annuity @10%, n=3) = (₱1M x 0.751315) + (₱120K x 2.486852) = 1,049,737



After tax interest expense: (1,049,737 x 10% x 70%) = 73,482

9. Solution: = Profit or loss less Preferred dividends

P a g e | 18 Basi c EPS Basi c EPS

Weighted average number of outstanding ordinary shares

-900,000 – (5,000,000 x 6%) =

2,000,000

Basic EPS = (-900,000 - 300,000) ÷ 2,000,000 Basic loss per share = -1,200,000 ÷ 2,000,000 = (0.60)

Dilute d EPS

Profit or loss plus After tax interest expense on convertible bonds = Weighted average number of outstanding ordinary shares plus Incremental shares

Dilute d EPS

=

-900,000 + 0 2,000,000 + (500,000 x 2)

Diluted EPS = -900,000 ÷ 3,000,000 = (0.30)

Answer: The diluted loss per share decreased the basic loss per share (anti-dilutive). Therefore, Bark Co. shall report only the Basic loss per share.

10. Solution: Basic earnings per share: Basi Profit or loss less Preferred dividends c = Weighted average number of outstanding ordinary shares EPS Basi c EPS

5,000,000 – (6% x ₱100 par x 100,000 sh.) =

200,000

Basic EPS = (5,000,000 – 600,000) ÷ 200,000 Basic EPS = 4,400,000 ÷ 200,000 = 22.00

Diluted earnings per share: The multiple potential ordinary shares are ranked according to their dilutive effect as follows: Convertible Options Convertible

P a g e | 19 PS Incremental earnings Incremental shares Incremental EPS Ranking



bonds

600,000

-

146,963

200,000

10,000

40,000

3.00

-

3.67

2nd

1st

3rd

Convertible PS: (100,000 sh. x ₱100 par x 6% = 600,000); (100,000 x 2 = 200,000)



Options: 50,0 00 2 00 10,000, 000 2 50 40, 000

Option shares Multiply by: Exercise price Proceeds from assumed exercise of options Divide by: Average ...