F7- EPS

Question 1

What interest rate is used to Discount stock options?

Answer 1

The risk-free interest rate

Question 2

What date is used as the measurement date for share-based payments classified as liabilities?

Answer 2

The settlement date

Question 3

How are compensation costs for share-based payments classified as liabilities measured?

Answer 3

• Measured by the change in the fair value of the instrument for each reporting period

Question 4

What is the net increase to shareholder equity in a reorganization where a company pays cash and issues stock to satisfy unsecured creditors?

Answer 4

Net increase to SHE :

Gain on settlement of debt
+
Credit to SHE from stock issuance

Question 5

How is BOOK Value per share of common stock calculated?

Answer 5

Total Book Value / Shares outstanding

Question 6

How is the dividend per share payout ratio calculated?

Answer 6

Dividends per share / Earnings per Share

Question 7

How is BASIC Earnings Per Share calculated?

Answer 7

(Net Income - P.S Dividends) / Average C/S Outstanding

If Cumulative:
Subtract the P/S dividend regardless of whether or not they’re declared.

Question 8

For EPS purposes- which date is used for calculation purposes when a stock split or stock dividend has occurred?

Answer 8

• Treat as if they occurred at the beginning of the year

- Regardless of when actually issued during the year

Question 9

For which areas is EPS required to be shown?

Answer 9

• Income from Continuing Operations & Net Income.

All others (discontinued operations- extraordinary items) can be shown on the Financial Statements or in the notes

Question 10

When do stock options increase shares outstanding?

Answer 10

Only if they are dilutive.

Their exercise price is LESS than the market value

If not- you ignore them in the calculation

Question 11

How is EPS calculated when convertible bonds are taken into consideration?

Answer 11

[Net Income + Bond Interest (Net of Tax)] /
(Avg. C/S Shares + Convertible Equivalents)

Bond interest is added back because if converted
- There would be no bond interest expense

Contingent Issue Agreements are included in Diluted EPS if contingency is met

Question 12

Income Avail to Common Shareholders

Answer 12

• By deducting from the line item income from Con’t operations & Net Income
• Dividends declared in the period on non-cumulative preferred stock
  (Regardless of whether they have been paid)
• Dividends Acc. in the period on Cumulative preferred stock
  (Regardless of whether they have been declared)

Question 13

Weighted- Average Number of Common Shares Outstanding Formula

Answer 13

• Shares outstanding at the beginning of the period

+ Shares Sold during the period (Time weighted)

• Shares reacquired during the period (time-weighted)

+ Stock Dividends & Stock splits (retroactively adj)

• Reverse stock splits ( retroactively adj)

= W.Avg Number of C/S outstanding for the entire period

Question 14

Diluted EPS Formula

Answer 14

(Net Income - P.S Dividend)
+ Interest on dilutive securities

DIVIDED By

W Avg. Number of C/S

[Assuming all dilutive securities are converted to common stock]

Question 15

Dilution from Options/Warrants/ Equivalents

Answer 15

• Treasury Stock Method
• Resulting in an incremental increase in shares outstanding
• But not the full amount of shares that are issued on exercise of the C/S equivalents.

Question 16

Dilutive Vs. AntiDilutive

Answer 16

• Options & Similar instruments are only Dilutive when:

~The avg. Market price of the underlying common stock EXCEEDS the Exercise price of the options or warrants

• B/C it is unlikely they would be exercised if the exercise price were higher than the market price.

Question 17

Additional Shares Outstanding Formula

Answer 17

Number of shares -
(Number of shares X Exercise Price)
Divided by
Average Market Price

Question 18

Treasury Stock Method

Answer 18

• Assumes that the proceeds from the exercise of stock options, warrants & equivalents will be used by the company to repurchase T.Stocks at the prevailing market price

Question 19

Compensation Expense Recognized Formula

Answer 19

= FV Stock Option x # of Shares

Question 20

Considered Contingent Shares for purposes of computing EPS?

Answer 20

Shares Issuable upon:

• Achieving a specific Net Inc. target
• The passage of a specific period of time
• The Issuance of a Patent.

Question 21

How is Total BOOK Value of Common Stock calculated?

Answer 21

Total Common Stock

• Total Preferred Stock
• P/S Dividends in Arrears
• P/S Liquidation Premium

Question 22

When a 3 Months or less Treasury Stock is Purchased, How is it reported?

Answer 22

• Not Reported

- Since the Treasury Bill is considered to be Cash Equivalent.