Ch 16 Part 2 EPS Narrated Part III

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This is part 3 of 4 related to the earnings per share discussion in Chapter 16 of the text. Be sure to view parts 1 and 2.

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Prepared by Coby Harmon University of California, Santa Barbara Intermediate Accounting

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Diluted EPS – Options and Warrants Measure the dilutive effects of potential conversion using the treasury-stock method . This method assumes: company exercises the options or warrants at the beginning of the year (or date of issue if later), and that it uses those proceeds to purchase common stock for the treasury. LO 7 Compute earnings per share in a complex capital structure. EPS - Complex Capital Structure

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LO 7 Compute earnings per share in a complex capital structure. E16-26 (EPS with Options): Zambrano Company ’ s net income for 2012 is $40,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2011, each exercisable for one share at $8. None has been exercised, and 10,000 shares of common were outstanding during 2012. The average market price of the stock during 2012 was $20. Instructions (a) Compute diluted earnings per share. (b) Assume the 1,000 options were issued on October 1, 2012 (rather than in 2011). The average market price during the last 3 months of 2012 was $20. EPS - Complex Capital Structure

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Proceeds if shares issued (1,000 x $8) $8,000 Purchase price for treasury shares $20 Shares assumed purchased 400 Shares assumed issued 1,000 Incremental share increase 600 LO 7 Compute earnings per share in a complex capital structure. E16-26 (a) Compute diluted earnings per share for 2012. Treasury-Stock Method ÷ EPS - Complex Capital Structure

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LO 7 Compute earnings per share in a complex capital structure. E16-26 (a) Compute diluted earnings per share for 2012. When calculating Diluted EPS, begin with Basis EPS. $40,000 10,000 = $3.77 Diluted EPS + 600 Basic EPS = 4.00 $40,000 10,600 = Options + EPS - Complex Capital Structure

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LO 7 Compute earnings per share in a complex capital structure. Treasury-Stock Method ÷ E16-26 (b) Compute diluted earnings per share assuming the 1,000 options were issued on October 1, 2012. x EPS - Complex Capital Structure

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LO 7 Compute earnings per share in a complex capital structure. E16-26 (b) Compute diluted earnings per share assuming the 1,000 options were issued on October 1, 2012. $40,000 10,000 = $3.94 Diluted EPS 150 Basic EPS = 4.00 $40,000 10,150 = Options + EPS - Complex Capital Structure

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