ACCO 420 Study Guide - Final Guide: Treasury Stock, New Balance, Stock Split
17 May 2016
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ACCO 310 – FINAL NOTES
CHAPTER 17 – EARNINGS PER SHARE
DETERMINE THE WACS OF SHARES OUTSTANTING FOR A YEAR
PERSPECT)VELY KELLY’S WAY
(Example E17-1)
DATE
EVENT
SHARES
OUTSTANDING
FACTOR
WEIGHTED
SHARES
January 1
Begin
580,000
12/12
(outstanding
all year)
580,000
February 1
Issue
180,000
11/12
(until end of
year)
165,000
March 1
Stock
dividends
745,000
x 1.1
New balance
(Group 2)
819,500
May 1
Retirement
(200,000)
8/12
(133,333)
June 1
Stock split
686,167
x 3
New balance
(Group 2)
2,059,500
October 1
Issue
600,000
3/12
15,000
WACS
2,073,500
BASIC EPS = Net Income – Preferred Dividends1/ WACS
DISCONTINUED OPERATIONS
(Example from E17-1)
Break down you income:
INCOME
Income before discontinued operations 3,888,000
Discontinued (432,000)
Net Income 3,456,000
→ Plug in, in this case: 3,456,000 + 432,000 = 3,888,000
BASIC EPS: Income before discontinued operations – 0/WACS
In this case: $3,888,000 – 0/2,073,000 = $1.88/share
1 Cumulative: Current year’s dividend → Either % x Par value or $ x Number of
shares
Non-cumulative: Only subtract if they were declared
If it doesn’t say, just multiply the number of Preferred shares outstanding by the $
dividends.
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LOSS FROM DISCONTINUED OPERATIONS: Discontinued/WACS
In this case: -432,000/2,073,500 = $(0.21)/share
NET OF BOTH WACS:
In this case: 1.88 -0.21 = $1.67/share → Same as previously calculated.
COMPARATIVE INCOME STATEMENT
(Example from E17-1)
2011 2012 2013
2011 WACS 2012 WACS 2013 WACS
Adjust if for Stock dividends Adjust if for Stock dividends → No need to
Or Stock splits (2012) Or Stock splits (2013) adjust
= Adjusted WACS = Adjusted WACS because it’s
the last year
DILUTED EPS
TESTS:
1) CONVERTIBLE PREFERRED SHARES
Preferred dividends/(Common shares x Number of months outstanding/12)
Basically, NI +(Preferred shares x rate)/WACS + Convertible preferred shares
2) CONVERTIBLE DEBT
Interest expense2 x (1 – Tax rate)/(Common shares x Number of months
outstanding/12)
Basically: NI + [IE x (1 – TR)]/ WACS + Convertible shares
3) OPTION/WARRANTS
CALL OPTIONS3
First, is it in(EP < MP) or out(EP > MP) of the money.
Out → Antidilutive
In:
Treasury stock method: 0/(Common shares x Number of months
outstanding/12)
To find c/s:
Proceeds (Exercise price x Number of shares=$)
Shares issued (Number)
2 At par: Coupon rate x Face value
At discount or premium -
1) Effective interest: Yield rate x Beginning balance for bonds payable
2) Straight line method: Coupon rate x Face value +(discount) or –(premium) -
bonds payable amortization
3 Don/t care about options bought, only take into consideration options issued.
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Shares purchased/retired (Proceeds/Market price)
Net shares (Shares issued – Shares purchased)
→ Often equals 0, which is probably the most dilutive (i.e. will reduce EPS the
most)
PUT OPTIONS
First, is it in(EP > MP) or out(EP < MP) of the money.
Out → Antidilutive
In:
Reverse treasury stock method: 0/(Common shares x Number of months
outstanding/12)
To find c/s:
Funds needed(Exercise price x Number of shares)
Shares issued (Funds/Market price)
Shares purchased/retired (Number)
Net shares (Shares issued – Shares retired)
MERGING FOR DILUTED EPS
(Example from E17-8)
(In order of ranking)
NUMERATOR DENOMINATOR EPS
Basic EPS 132,000 / 200,000 0.66
Call option B + 0 + 3,000
(New balance) 132,000 / 203,000 (New EPS) 0.654
Convertible bond B + 20,085 + 40,000
DILUTED EPS 152,085 / 243,000 (New EPS) 0.63
4
→
Keep going because new EPS is lower
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Determine the wacs of shares outstanting for a year. Basic eps = net income preferred dividends1/ wacs. Plug in, in this case: 3,456,000 + 432,000 = 3,888,000. Basic eps: income before discontinued operations 0/wacs. In this case: ,888,000 0/2,073,000 = . 88/share. 1 cumulative: current year"s dividend either % x par value or $ x number of. If it doesn"t say, just multiply the number of preferred shares outstanding by the $ shares. Non-cumulative: only subtract if they were declared dividends. In this case: 1. 88 -0. 21 = . 67/share same as previously calculated. No need to adjust because it"s the last year: convertible debt. Preferred dividends/(common shares x number of months outstanding/12) Basically, ni +(preferred shares x rate)/wacs + convertible preferred shares. Interest expense2 x (1 tax rate)/(common shares x number of months. Basically: ni + [ie x (1 tr)]/ wacs + convertible shares outstanding/12: option/warrants. First, is it in(ep < mp) or out(ep > mp) of the money.
