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Solutions to in class questions -- Earnings per Share

Solutions to in class questions -- Earnings per Share -...

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BUSINESS 450 FALL 2011 SOLUTIONS TO IN-CLASS PROBLEMS QUESTION 1 -- Earnings per share Basic Earnings per Share: Net income for common shares: Net income 1,100,000 Cum div on Class A preferred shares (100,000) Cum div on Class B preferred shares (240,000) 760,000 Average number of shares outstanding: For twelve months 600,000 For ten months (10/12 x 80,000) 66,667 666,667 Basic earnings per share (760,000 / 666,667) 1.14 Diluted Earnings per Share: Stock Option (i) (in the money) Proceeds (50,000 x \$15) 750,000 Share equivalent (750,000 / \$20) 37,500 Options deemed exercised 50,000 Dilutive effect 12,500 shares Stock Option (ii) (in the money) Proceeds (120,000 x \$17) 2,040,000 Share equivalent (2,040,000 / \$20) 102,000 Options deemed exercised 120,000 Dilutive effect 18,000 shares Effect of conversion of Class B preferred shares 240,000 / 80,000 x 5 0.60 Diluted earnings per share After considering only the exercise of the options: = 760,000 697,167 = 1.09 760,000 ((666,667 + 12,500 + 18,000)

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