SUGGESTED SOLUTION ASSIGNMENT #4

Question #1.1

a) Calculate the basic earnings per share for Kringe Corporation as they would appear in its December 31, 2009 financial statements. Weighted Average shares outstanding:
Date January 1 April 30 Original Conversion # of shares 1,500,000 *15,000 Period Weight 12/12 8/12 Wt Average 1,500,000 10,000 1,510,000

*(4,000,000 / $1,000) x 1/4 x 15 BEPS Net income Preferred share dividends Weighted average shares outstanding $4,000,000-$540,000* = $3,460,000 = $2.29 1,510,000 1,510,000

*270,000 x $2 = $540,000 b) Calculate the Diluted earnings per share for Kringe Corporation as they would appear in its December 31, 2009 financial statements. Show calculations of dilutive factors for all potentially dilutive securities. DEPS
BONDS Converted BONDS Outstanding Preferred shares A Preferred shares B FVx r% x (1-T) x # mons # conv x #shares x #mons FV x r% x (1-T) # conv x #shares # of Preferred x dividend # of preferred x conv # # of Preferred x dividend # of preferred x conv # 0 . 200,000 x 2 No dividend in 2010 so the dilution is for # of shares only 400,000 400,000 shares issued dilutive 270,000 x $2 270,000 x 3 $540,000 810,000 $0.67 dilutive $3,000,000 x0.09x.0.6 1,000 x 15 $162,000 45,000 $3.60 Antidilutive $1,000,000 x0.09x.0.6x4/12 1,000 x 15 x 4/12 $18,000 5,000 $3.60 Antidilutive

Series 1 options

[ 1- (exercise price)] X # OPTIONS = [ 1- (45)] X 125,000

average price In the money 50

= 12,500 dilutive

Series 2 options Not in the money

[ 1- (exercise price)] X # OPTIONS = [ 1- (60)] X 100,000

average price 50 DEPS
Shares $3,460,000 1,510,000 0 12,500 $3,460,000 1,522,500 540,000 810,000 $4,000,000 2,332,500 0 400,000 $4,000,000 2,732,500

= -20,000 Anti dilutive

Basic Options 1 Preferred shares A Preferred shares B

$2.29 $2.27 $1.71 $1.46

c) Present the partial disclosure for earnings per share and net income as they would appear on the income statement Income statement presentation of EPS:

Net Income Basic earnings per common share Diluted earnings per common share

$4,000,000 $2.29 $1.46

Question #1.2

a) Calculate the weighted average number of shares outstanding for Durant at December 31, 2009 for the purposes of calculating basic earnings per share.

Date 1/1 4/1 5/1 6/1 7/1 9/1 11/30 12/1

Event Beginning 900,000 Less: treasury (100,000) Issue common Treasury resale Conversion of preferred. 10% stock dividend Purchase and cancellation of common 1 2 reverse stock split Purchase treasury shares Total Equivalent Shares

# of shares o/s 800,000 30,000 60,000 500,000

Equivalent # of Weight shares 1.1 x .5 12/12 1.1 x .5 1.1 x .5 1.1 x .5 9/12 8/12 7/12

Weighted Average 440,000 12,375 22,000 160,417

(9,0000) (120,000)

x .5

4/12 1/12

(1,500) (10,000) 623,292

b) Calculate the basic and diluted earnings per share for Durant as they would appear in its December 31, 2009 financial statements. Show calculations of dilutive factors for all potentially dilutive securities.

BEPS

Net income Preferred share dividends Weighted average shares outstanding * converted without dividend payment

$7,100,000- 0* = $7,100,000 623,292 623,292

= $11.39

DEPS Dilution calculations

BONDS Outstanding FV x r% x (1-T) $2,000,000 x0.08x0.6 400 x 20 0 . 100,000 x 5 x 5/12 No div, so dilutive in shares $96,000 8,000 208,333 $12.00 Antidilutive 208,333 dilutive

# conv x #shares Preferred shares period # of Preferred x div x mos Before # of preferred x conv # conversion

CEO/Directors Options 3

Out of the Money CFO Options [ 1-($6)] x 25,000 = 11,364 $11

PUT Options The exercise price is greater than the average market price so

[(Exercise price) - 1] X # OPTIONS = [ (20)-1] X 100,000

Ave Mkt price 11 DEPS
Shares 623,292 81,819 705,111 11,364

= 81,819 dilutive

Basic Put Options

CFO Options
Preferred shares

$7,100,000 0 $7,100,000 0

$11.39 $10.07

$7,100,000
0 $7,100,000

716,745
208,333 925,078

$9.91
$7.68

Question #1.3

DEPS shows the earnings that a shareholder would have had claim to IF all potential common shareholders had converted during the year. So DEPS shows how much a shareholders claim to future earnings could be diluted. If the BEPS/ DEPS difference is large, the shareholder may expect a smaller proportion of the future earnings. DEPS indicates not only the potential dilution of future earnings, but also the potential dilution of control over the company. Usually, the common shareholders are the only shareholders with voting privileges. If holders of dilutive debt or preferred shares convert in the future, then there will be more shareholders with voting rights and may influence the composition of the board of directors. This may not be to the advantage of the original shareholders.