# Capital Structure - DOC

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```					 Name: __________________________ Problem chapter 16

1. Basic and diluted EPS.
The following information was taken from the books and records of Teller, Inc.:
Net Income                          \$900,000
Capital Structure: Convertible bonds 8% \$40,000 worth. Each \$800 bond can be converted into 25
shares of common stock.
The common stock \$10 par started the year with 50,000 shares outstanding (issued 8 years ago). On
March 1 there was a repurchase of 3,000 shares. On August 1 there was a sale of 8,000 shares to be
placed in treasury. On November there was a 2 for 1 split.
At the end of the year there were stock warrants outstanding (for the whole year) to purchase 24,000
shares of stock for \$45 per share. The average market price for the stock is \$70.
The corporate income tax rate averages 35%

Instructions
Compute basic and diluted earnings per share.

Change in shares     shares outstanding     transaction of year   split    WA
1-Jan                                      50,000            2/12            2       16,666.67
1-Mar          -3000                       47,000            5/12            2       39,166.67
1-Aug           8000                       55,000            3/12            2       27,500.00
1-Nov                                     110,000            2/12                    18,333.33
101,666.67

Basic EPS = NI/WA = 900,000/101667 = 8.85
Warrants
24,000*45/70 = 15,429
24,000-15,429=8,571
Diluted EPS
900000       +40000*0.08*(1-0.35)    =8.09
101667+8571 +40000*25/800

8.164       >        1.664

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