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EPS Practice Problems

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EPS Practice Problems

Problem #1

Diluted EPS is calculated for companies with complex capital structures only.

True
False

Problem #2

Company X has 15 million shares outstanding on January 1, 20X4. They issue 2 million more shares on April 1,
20X4 and 3 million more shares on October 1, 20X4. Calculate the weighted average shares outstanding during
the year.
a. 16.83 million shares
b. 17.25 million shares
c. 18.50 million shares
d. 20.00 million shares

Problem #3

Calculate Basic EPS using the following information:

Net Income ............................................ $ 1,500


Common Dividends ................................ $ 400
Preferred Dividends ................................ $ 500
Weighted Average Shares Outstanding ..... 1,000 shares

a. $1.50
b. $1.10
c. $0.60
d. $1.00
Problem #4

Shoemaker Company had 1,000 common shares issued and outstanding at January 1. During the year,
Shoemaker also had the common stock transactions listed below.

April 1 Issued 300 previously unissued shares

May 1 Split the stock 2-for-1

July 1 Purchased 100 shares for the treasury

Given this information, what is the weighted-average number of shares that Shoemaker should use when
computing basic EPS?

Problem #5

On January 1, 20X1, PPQ Inc had 200,000 shares of common stock outstanding. In addition, the following
securities were outstanding for the entire year of 20X1:

 $5,000,000 of 10% convertible bonds. Each $1,000 bond is convertible into 25 shares of common stock.

The tax rate is 20%. The market price of PPQ Inc common stock averaged during the year at $25. Net income
for the year was $700,000.

Compute basic EPS:

Compute diluted EPS:


Problem #6

On January 1, 20X1, Styx Inc. had 450,000 shares of common stock outstanding. In addition, the following
securities were outstanding for the entire year of 20X1:

 40,000 shares of $100 par, 10% cumulative preferred stock.


 100,000 options with a strike price of $18. Each option allows the holder to purchase one share of
Skywalker common stock.

The tax rate is 20%. The market price of Styx Inc. common stock averaged during the year at $20. Net income
for the year was $800,000.

Compute basic EPS:

Compute diluted EPS:


Problem #7

On January 1, 20X1, Cleo Corp. had 500,000 shares of common stock outstanding. In addition, the following
securities were outstanding for the entire year of 20X1:

 40,000 shares of $100 par, 8% convertible preferred stock. Each share of the preferred stock is
convertible into 8 shares of common stock.

The tax rate is 20%. The market price of Cleo Corp. common stock averaged during the year at $25. Net income
for the year was $900,000.

Compute basic EPS:

Compute diluted EPS:

Problem #8

In 20X9, Matrix had net income of $200,000 and weighted shares outstanding of 50,000. During the year,
Matrix had an average stock price of $33. Their tax rate is 20%.

For the following independent cases, state whether the effect of the security is dilutive or antidilutive:

 10%, $200,000 face value bonds (issued at par), convertible into 5,000 shares of common stock.

 5,000 shares of 8%, $100 par, cumulative preferred stock, convertible into 4,000 shares of common stock.
ANSWERS

Problem #1

Diluted EPS is calculated for companies with complex capital structures only.

True
False

True

Problem #2

Company X has 15 million shares outstanding on January 1, 20X4. They issue 2 million more shares on April 1,
20X4 and 3 million more shares on October 1, 20X4. Calculate the weighted average shares outstanding during
the year.
a. 16.83 million shares
b. 17.25 million shares
c. 18.50 million shares
d. 20.00 million shares

1/1 15M shares O/S * 3/12 = 3.75M weighted average


4/1 17M shares O/S * 6/12 = 8.5M weighted average
10/1 20M shares O/S * 3/12 = 5M weighted average
Total weighted-average outstanding shares = 17.25

Problem #3

Calculate Basic EPS using the following information:

Net Income ............................................ $ 1,500


Common Dividends ................................ $ 400
Preferred Dividends ................................ $ 500
Weighted Average Shares Outstanding ..... 1,000 shares

a. $1.50
b. $1.10
c. $0.60
d. $1.00

(1500 – 500) / 1000 = 1.00


Problem #4

Shoemaker Company had 1,000 common shares issued and outstanding at January 1. During the year,
Shoemaker also had the common stock transactions listed below.

April 1 Issued 300 previously unissued shares

May 1 Split the stock 2-for-1

July 1 Purchased 100 shares for the treasury

Given this information, what is the weighted-average number of shares that Shoemaker should use when
computing basic EPS?

1/1 1,000 shares x 2 (retro adj.) x 3/12 = 500

4/1 1,300 shares x 2 (retro adj.) x 3/12 = 650

7/1 2,500 shares x 6/12 = 1,250, Note: The reacquired shares decrease the shares outstanding (2,600 shares
outstanding prior to reacquisition – 100 shares reacquired = 2,500 shares.)

2,400 shares

Problem #5

On January 1, 20X1, PPQ Inc had 200,000 shares of common stock outstanding. In addition, the following
securities were outstanding for the entire year of 20X1:

 $5,000,000 of 10% convertible bonds. Each $1,000 bond is convertible into 25 shares of common stock.

The tax rate is 20%. The market price of PPQ Inc common stock averaged during the year at $25. Net income
for the year was $700,000.

Compute basic EPS:

Numerator = 700,000
Denominator = 200,000
Basic EPS = 700,000 / 200,000 = 3.50

Compute diluted EPS:

Numerator = 700,000 + (5,000,000 x 10% x (1 – 20%)) = 1,100,000


Denominator = 200,000 + ((5,000,000 / 1,000) x 25) = 325,000
Diluted EPS = 1,000,000 / 325,000 = 3.38
Problem #6

On January 1, 20X1, Styx Inc. had 450,000 shares of common stock outstanding. In addition, the following
securities were outstanding for the entire year of 20X1:

 40,000 shares of $100 par, 10% cumulative preferred stock.


 100,000 options with a strike price of $18. Each option allows the holder to purchase one share of
Skywalker common stock.

The tax rate is 20%. The market price of Styx Inc. common stock averaged during the year at $20. Net income
for the year was $800,000.

Compute basic EPS:

Numerator = 800,000 – (40,000 X 100 X 10%) = 400,000


Denominator = 450,000
Basic EPS = 400,000 / 450,000 = 0.88

Compute diluted EPS:

New Shares to issue related to stock options:


Potential common shares = 100,000
Proceeds = 100,000 x 18 = 1,800,000
Shares repurchased = 1,800,000 / 20 = 90,000
New shares to issue = 100,000 – 90,000 = 10,000

Numerator = 800,000 – (40,000 X 100 X 10%) = 400k


Denominator = 450,000 + 10,000 = 460,000
Diluted EPS = 400,000 / 460,000 = 0.87

Problem #7

On January 1, 20X1, Cleo Corp. had 500,000 shares of common stock outstanding. In addition, the following
securities were outstanding for the entire year of 20X1:

 40,000 shares of $100 par, 8% convertible preferred stock. Each share of the preferred stock is
convertible into 8 shares of common stock.

The tax rate is 20%. The market price of Cleo Corp. common stock averaged during the year at $25. Net income
for the year was $900,000.

Compute basic EPS:

Numerator = 900,000 – (40,000 X 100 X 8%) = 580,000


Denominator = 500,000
Basic EPS = 580,000 / 500,000 = 1.16
Compute diluted EPS:

Numerator = 900,000 = 900,000


Denominator = 500,000 + (40,000 x 8) = 820,000
Diluted EPS = 900,000 / 820,000 = 1.10

Problem #8

In 20X9, Matrix had net income of $200,000 and weighted shares outstanding of 50,000. During the year,
Matrix had an average stock price of $33. Their tax rate is 20%.

For the following independent cases, state whether the effect of the security is dilutive or antidilutive:

 10%, $200,000 face value bonds (issued at par), convertible into 5,000 shares of common stock.

Basic EPS = 200,000 / 50,000 = $4.00

If converted:
Numerator impact = 10% x 200,000 x (1-20%) = 16,000 (net interest savings if converted)
Denominator impact = 5,000
Diluted EPS = 216,000 / 55,000 = $3.93

Dilutive as converting the bonds results in decrease to EPS.

 5,000 shares of 8%, $100 par, cumulative preferred stock, convertible into 4,000 shares of common stock.

Basic EPS = 200,000 - 40,000 / 50,000 = $3.20 (to account for preferred stock dividends if stock not
converted)

If converted:
Numerator impact = 5,000 x 8% x 100 = 40,000 (no dividend payments removed)
Denominator impact = 4,000
Diluted EPS = 200,000 / 54,000 = $3.70

Antidilutive as diluted EPS is higher than basic.

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