Chapter 16 Team Problem – Spring 2011 (10 points)
Instructions to teams: make this page the cover sheet to your solution. Staple it to
your solution in the upper left-hand corner. Each team member present and
participating must print and sign his / her name in the space provided below.
Part I
Assume the following information concerning Tulley Company for 2008:
A. Net income: $325,000
B. Common Stock, $5 par, 40,000 shares issued and outstanding as of January
1, 2008.
C. Cumulative, Convertible Preferred Stock, $10 par, 8%, 1,000 shares issued
and outstanding as of January 1, 2008. Each share of P/S is convertible into
10 shares of C/S. No dividends were declared during 2008.
D. Weighted Average number of C/S outstanding during the year was 98,975.
E. Tulley Company has outstanding 10, $1,000 par, convertible bonds with a 7%
stated rate. Each bond can be convertible into 100 shares of common stock.
No bonds were converted during the year.
F. Unexpired stock options to purchase 10,000 shares of common stock at $32
per share were outstanding throughout the year. None of the options were
exercised during 2008.
G. Warrants to purchase 1,000 shares of common stock at $18 per share were
attached to the Preferred Stock at the time of issuance. It takes one
warrant to buy one share of stock. As of December 31, no warrants had been
exercised.
H. Income tax rate: 40 percent.
I. Average market price per share of common stock during the entire year was
$30. Closing market price per share at year end was $35.
Required: Determine basic and diluted earnings per share for 2008.
Printed name and signature of each present and participating student:
Part II
The following transactions occurred with respect to Alt Corporation’s common
stock:
Jan.1 Common stock outstanding 700,000 shares
Feb.1 Additional shares were sold for cash 180,000 shares
Jul.1 Additional shares were sold for cash 200,000 shares
Aug.1 10% stock dividend
Sep.1 Additional shares were sold for cash 240,000 shares
Oct.1 Issued a 2-for-1 stock split
Nov.1 Acquired Treasury Stock 120,000 shares
Required:
1. Calculate the weighted-average shares outstanding for 2008.
Solution
Part I
Basic EPS
NI available to C/S: $325,000-(1,000*$10*8%) = $324,200
Basic EPS = $324,200 = $3.28
98,975
Diluted EPS
Stock Options – Antidilutive because the exercise price ($32) is greater
than the average stock price ($30)
Stock Warrants – Dilutive because the exercise price ($18) is less than the
average stock price ($30).
Treasury Stock Method used to assume exercise of warrants:
Cash proceeds received by company = 1,000 shares * $18 = $18,000
Shares Needed 1,000
Repurchase TS 600 ($18,000/$30)
Incremental shares 400
Per Share Effect = $0 = $0
400
Convertible P/S
If-Converted:
Numerator: 1,000*$10*8% = $800 because no dividend would have
accumulated if they were converted at beginning of year
Denominator: 1,000*10 = 10,000 shares
Per Share Effect = $800 = $0.08 dilutive because $0.08<$3.28
10,000
Convertible bonds
If-Converted:
Numerator: ($10,000*.07)*(1-.40) = $420
Denominator: 10 * 100 = 1,000 shares
Effect on EPS = $420 = $0.42 dilutive because $0.42<$3.28
1,000
Diluted EPS =
Warrants: $324,200 = $324,200 =$3.26
98,975 + 400 99,375
Conv. P/S: $324,200 + $800 = $325,000 = $2.97
99,375 + 10,000 109,375
Conv. Bonds: $325,000 + $420 = $325,420 = $2.95
109,375 + 1,000 110,375
Part II
Date Shares O/S Restate % Yr WA Shares
1/1-2/1 700,000 1.1 x 2 1/12 128,333
2/1-7/1 880,000 1.1 x 2 5/12 806,667
7/1-8/1 1,080,000 1.1 x 2 1/12 198,000
8/1-9/1 1,188,000 2 1/12 198,000
9/1-10/1 1,428,000 2 1/12 238,000
10/1-11/1 2,856,000 - 1/12 238,000
11/1-12/31 2,736,000 - 2/12 456,000
Total WA 2,263,000