Diluted EPS (without conversion of bonds)

net preferred preferred
income dividends dividends
$520 – 120* +120* $520

——————————————————————————— = —— = $3.94

100 +32 132
shares conversion
at Jan. 1 of preferred
stock

After including the conversion of the preferred stock only, EPS is $3.94. The $4.00 incremental effect of the conversion of the bonds is higher than that amount, so the second security is antidilutive. This is demonstrated by calculating EPS again after including the conversion of the bonds:

Diluted EPS (with conversion of bonds)

net preferred preferred after-tax
income dividends dividends interest savings
$520 – 120* +120* + $90**– 40% ($90**) $574

——————————————————————————— = —— = $3.95

100 +32 + 13.5 145.5
shares conversion conversion
at Jan. 1 of preferred of bonds

So, we omit the convertible bonds from the calculation and diluted EPS is $3.94. That’s why we should include securities in the calculation in reverse order, beginning with the lowest incremental effect (most dilutive).

*60 million shares x $2

** $900 million x 10%

Problem 19-16

Requirement 1

(amounts in thousands, except per share amount)

Basic EPS:

preferred
net income dividends
$150 – $77 $73
———————————————— = ——— = $1.83
40 40
weighted-average
shares

With conversion of preferred stock
(Diluted EPS):

net income
$150 $150
———————————————— = ——— = $2.50
40 + 20 60
weighted-average conversion
shares of preferred
shares

Since the assumed conversion of the convertible preferred stock causes EPS to increase, it is antidilutiveand therefore ignored when calculating EPS.

Problem 19-16 (concluded)

Requirement 2

Basic EPS:

net income
$150
————————— = $3.75
40
weighted-average
shares

With conversion of bonds:

after-tax
net income interest savings
$150 + $40 – 40% ($40) $174
———————————————— = ——— = $3.87
40 + 5 45
weighted-average conversion
shares of bonds

Since the assumed conversion of the convertible bonds causes EPS to increase, it is antidilutive and therefore ignored when calculating EPS.

Requirement 3

Since the exercise price is less than average market price, the options are notantidilutive and therefore assumed exercised when calculating diluted EPS.

Requirement 4

Since the exercise price is higher than the average market price, the warrants are antidilutive and therefore ignored when calculating diluted EPS.

Requirement 5

The 5,000 shares are added to the denominator when calculating diluted EPS since 2011 net income is higher than the conditional amount. Since only the denominator is increased, the effect is notantidilutive.

Problem 19-17

(amounts in millions, except per share amounts)

Basic EPS

net
income
$560 $560

—————————————————————— = —— = $1.44

400 – 30 (4/12) 390

shares new
at Jan. 1 shares

Diluted EPS

net after-tax*
income interest savings
$560 + $30 – 40% ($30) $578

—————————————————————— = —— = $1.36

400 – 30 (4/12) + 36 426

shares new conversion
at Jan. 1 shares of bonds

*Interest on the bonds = $300 million x 10% = $30 million. If the bonds were not outstanding, interest expense would have been $30 million lower, and tax expense would have been 40% x $30 million, or $12 million higher, a net after-tax savings of $18 million.

Problem 19-18

(amounts in thousands, except per share amounts)

Basic EPS

net preferred
income dividends
$650 – $40* $610
—————————————————————————————————— = ——— = $1.37
440 + 16 (3/12) 444
shares new
at Jan. 1 shares

Diluted EPS

net preferred preferred
income dividends dividends
$650 – $40* + 40* $650
————————————————————————————————— = ——— = $1.33
440 + 16 (3/12) + (20 – 15**) + 40 489
shares new exercise conversion
at Jan. 1 shares of options of preferred
shares

* 4,000 shares x $100 par x 10% = $40,000

**Assumed purchase of treasury shares

20,000 shares

x $30 (exercise price)

$600,000

ч $40 (average market price)

15,000 shares

Problem 19-19

(amounts in millions, except per share amounts)

Basic EPS

net preferred
income dividends
$1,476 – $60* $1,416
——————————————————————————————————————— = ——— = $2.27
600 + 72 (4/12) 624
shares new
at Jan. 1 shares

Diluted EPS

net preferred after-tax
income dividends Interest savings
$1,476 – $60* + $160 - 40% ($160) $1,512
——————————————————————————————————————— = ——— = $2.09
600 + 72 (4/12) + (60 – 40)** + 80 724
shares new exercise conversion
at Jan. 1 shares of options of bonds

*Preferred dividends: 6% x $50 x 20 million shares = $60 million

**Computation of Treasury Shares:

60 million shares

x $12 exercise price

$720 million proceeds

ч $18 average share price

40 million treasury shares

Problem 19-20

Requirement 1

(amounts in millions, except per share amount)

Basic EPS

net
income

$150 $150

—————————————————————————— = —— = $.50

300 300
shares
at Jan. 1

Diluted EPS

net
income

$150 $150

—————————————————————————— = —— = $.49

300 + (30 – 27.5*) + (15 – 11.25***) 306.25
shares assumed exercise assumed vesting
at Jan. 1 of options of restricted stock

* Reacquired shares for assumed exercise of stock options in 2011:

30 million options

x $10 exercise price

$300 million cash proceeds

30 unexpensed compensation**

$330 million hypothetical proceeds

ч $12 average market price

27.5 million shares assumed reacquired

** Calculation of proceeds from unexpensed compensation:

30 million shares x $3 = $90 million total compensation to be expensed $30 million per year over 3 years (2010-2012). The expense has been recorded in 2010 and 2011:

2010 ($ in millions)

Compensation expense 30

Paid-in capital-stock options 30

Compensation expense 30

Paid-in capital-stock options 30

Problem 19-20 (continued)

So, $30 million compensation (for 2012) remains unexpensed and is considered part of the hypothetical proceeds of the options.

Because these are incentive stock options, excess tax benefits are not considered to be part of the proceeds.

Date: 2016-01-14; view: 836