Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 16: Q26E (page 880)

(EPS with Options, Various Situations) Venzuela Company’s net income for 2017 is \(50,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2016, each exercisable for one share at \)6. None has been exercised, and 10,000 shares of common were outstanding during 2017. The average market price of Venzuela’s stock during 2017 was \(20.

Instructions

(a) Compute diluted earnings per share. (Round to nearest cent.)

(b) Assume the same facts as those assumed for part (a), except that the 1,000 options were issued on October 1, 2017 (rather than in 2016). The average market price during the last 3 months of 2017 was \)20.

Short Answer

Expert verified
  1. Diluted Earnings per share $4.67
  2. Diluted Earnings per share $4.91

Step by step solution

01

(a) Computation of Diluted Earnings per share-

a)

Options issued

1,000

Multiple: Exercise price per share

$6

Amount paid towards shares

$6,000

Amount paid towards shares (A)

$6,000

Amount paid towards shares (B)

$20

Value of options (A/ B)

300

Options issued

1,000

Less: Value of options

(300)

Diluted shares

700

Net Income

$50,000

Average share outstanding (10,000+700)

10,700

Diluted Earnings Per share

$ 4.67

02

(b) Computation of Diluted Earnings per share-

b)

Diluted shares

700

Months

3/12

Weighted average for the period holding

175

Net Income (A)

$50,000

Average share outstanding (10,000+175) (B)

10,175

Diluted Earnings Per share (A/B)

$ 4.91

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

What are stock rights? How does the issuing company account for them?

16-18 (L04) (EPS: Simple Capital Structure) Flagstad Inc. presented the following data.

Net income \(2,500,000

Preferred stock: 50,000 shares outstanding,

\)100 par, 8% cumulative, not convertible 5,000,000

Common stock: Shares outstanding 1/1 750,000

Issued for cash, 5/1 300,000

Acquired treasury stock for cash, 8/1 150,000

2-for-1 stock split, 10/1

Instructions

Compute earnings per share.

Cordero Corporation has an employee stock-purchase plan which permits all full-time employees to purchase 10 shares of common stock on the third anniversary of their employment and an additional 15 shares on each subsequent anniversary date. The purchase price is set at the market price on the date purchased and no commission is charged. Discuss whether this plan would be considered compensatory.

CA16-2 ETHICS (Ethical Issues—Compensation Plan) The executive officers of Rouse Corporation have a performance-based compensation plan. The performance criteria of this plan is linked to growth in earnings per share. When annual EPS growth is 12%, the Rouse executives earn 100% of the shares; if growth is 16%, they earn 125%. If EPS growth is lower than 8%, the executives receive no additional compensation.

In 2014, Joan Devers, the controller of Rouse, reviews year-end estimates of bad debt expense and warranty expense. She calculates the EPS growth at 15%. Kurt Adkins, a member of the executive group, remarks over lunch one day that the estimate of bad debt expense might be decreased, increasing EPS growth to 16.1%. Devers is not sure she should do this because she believes that the current estimate of bad debts is sound. On the other hand, she recognizes that a great deal of subjectivity is involved in the computation.

Instructions

Answer the following questions.

(a) What, if any, is the ethical dilemma for Devers?

(b) Should Devers’s knowledge of the compensation plan be a factor that influences her estimate?

(c) How should Devers respond to Adkins’s request?

Explain the treasury-stock method as it applies to options and warrants in computing dilutive earnings per share data.
See all solutions

Recommended explanations on Business Studies Textbooks

Business Case Studies

Read Explanation

Financial Performance

Read Explanation

Business Operations

Read Explanation

Managerial Economics

Read Explanation

Organizational Communication

Read Explanation

Organizational Behavior

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free