The standard equation for computing basic earnings per share (EPS) is:
A. Basis EPS = [Net Income – Preferred Dividends]/Weighted Average Number of Common Shares Outstanding.
B. [Net Income - Common Dividends] / Weighted Average Number of Common Shares Outstanding.
C. Total Assets – Total Liabilities + Stockholder’s Equity.
D. [sales - Cost of Goods Sold] / Number of Preferred Shares Outstanding.
A
At the beginning of 2000, the Alaska Corporation had 2 million shares of common stock outstanding and no preferred stock. At the end of August, 2000, Alaska issued 600,000 new shares of common stock. If Alaska reported net income equal to $8.8 million, what was the firm’s earnings per share for 2000?
A. $4.40.
B. $3.67.
C. $4.00.
D. $3.38.
C
EPS = earnings available to common shareholders divided by the weighted average number of common shares outstanding. With no preferred shareholders, all of net income is available to the common shareholders. The weighted average number of shares outstanding equals the original 2 million shares plus 4/12 of the additional 600,000 shares. The 4/12 weight is used because the new shares were only outstanding 4 months of the year. Thus, EPS = $8.8 million / [2 million + (4/12)(600,000)] = 8.8/2.2 = $4.00.
An analyst has gathered the following information about a company:
• 110,000 shares of common outstanding at the beginning of the year.
• The company repurchases 20,000 of its own common shares on July 1.
• Earnings are $300,000 for the year.
• 10,000 shares of existing 10 percent cumulative $100 par preferred outstanding that is not in arrears at the beginning or ending of the year.
• The company also has $1 million in 10 percent callable bonds outstanding.
• The company has declared a $0.50 dividend on the common.
What is the company’s basic Earnings Per Share?
A. $1.00.
B. $1.40.
C. $2.00.
D. $3.00.
C
Interest is already deducted from earnings. (300000 – 100000)/100,000
Last year, the AKB Company had net income equal to $5 million. Combined state and local taxes were 45 percent. The firm paid $1 million to its 1 million common shareholders and $250,000 to 100,000 preferred shareholders. What was AKB’s earnings per share (EPS) last year?
A. $3.75.
B. $4.75.
C. $2.50.
D. $2.25.
B
EPS = earnings available to common shareholders divided by the weighted average number of common shares outstanding. Earnings available to common shareholders is net income minus preferred dividends, or $4,750,000 (= $5 million – 250,000) for AKB.
The ZZT Company went public on June 1, 1999, by issuing 25 million shares of common stock. In 2000, the firm raised additional capital by issuing 2 million shares of preferred stock. What is the weighted average number of common shares outstanding for the year ending December 31, 2000?
A. 15,750,000.
B. 14,583,333.
C. 10,416,667.
D. 25,000,000.
D
The weighted average number of common shares outstanding is the number of shares outstanding during the year weighted by the portion of the year they were outstanding. Since no new common shares were issued in 2000, and there were 25 million shares at the end of 1999, there are 25 million shares at the end of 2000. Note that the preferred stock shares do not affect the common shares outstanding.
At the beginning of 2001, Osami Corporation had 1.4 million shares of common stock outstanding and no preferred stock. At the end of August 2001, Osami issued 1.2 million new shares of common stock. If Osami reported net income equal to $7.2 million, what were its earnings per share (EPS) for 2001?
A. $2.77.
B. $4.00.
C. $1.66.
D. $3.33.
B
Basic EPS = earnings available to common shareholders divided by the weighted average number of common shares outstanding. With no preferred shareholders, all of net income is available to the common shareholders. The weighted average number of shares outstanding equals the original 1.4 million shares plus 4/12 of the additional 1.2 million shares. The 4/12 weighting on the new shares is because the new shares were only outstanding 4 months of the year. Thus, the weighted average number of shares outstanding is [1.4 + (4/12)(1.2)] million = 1.8 million shares. So basic EPS = $7.2 million / 1.8 million = $4.00.
Robinson Company had 1 million shares outstanding at the beginning of the year. On April 1, Robinson issued an additional 300,000 shares. On July 1, Robinson issued 200,000 more shares. What is Robinson’s weighted average number of shares outstanding for the calculation of earnings per share?
A. 1,200,000 shares.
B. 1,500,000 shares.
C. 1,325,000 shares.
D. 1,000,000 shares.
C
Wtd. avg. shares = 1,000,000 + (0.75) 300,000 + (0.5) 200,000 = 1,325,000 shares
جزاك الله خيرا ابو بدر
2.: Discounted Cash Flow Applications
a: Calculate the net present value and internal rate of return of a capital investment project.
Example: Calculate the NPV of an investment project with an initial cost of $5 million (CF0 = -5 million), and positive cash flows of CF1 = 1.6 million at the end of year 1, CF2 = 2.4 million at the end of year 2, and CF3 = 2.8 million at the end of year 3. Use 12% as the discount rate.
NPV = [-5 + 1.6 / (1.12)] +[2.4 / (1.12)2] + [2.8 / (1.12)3] = $332,130
Example: Using the same investment project, calculate IRR.
0 = -5 + [1.6 / (1 + IRR)] + [2.4 / (1 + IRR)2] + [2.8 / (1 + IRR)3] = 15.52%
1.A: Analysis of Inventories
a: Compute ending inventory balances and cost of goods sold using the LIFO, FIFO, and average cost methods to account for product inventory.
Example: Given the following inventory data:
January 1 (beginning inventory): 2 units @ $2 per unit = $ 4
January 7 purchase: 3 units @ $3 per unit = $9
January 19 purchase: 5 units @ $5 per unit = $25
Cost of goods available (BI + P): 10 units = $38
Units sold during January: 7 units
FIFO cost of goods sold (value the 7 units sold at unit cost of last units purchased). Start at the top and work down:
From beginning inventory: 2 units @ $2 per unit = $4
From first purchase: 3 units @ $3 per unit = $ 9
From second purchase: 2 units @ $5 per unit = $10
FIFO cost of goods sold: 7 units = $23
Ending inventory: 3 units @ $5 = $15
LIFO cost of goods sold (value the 7 units sold at unit cost of first units purchased). Start at the bottom and work up:
From second purchase: 5 units @ $5 per unit = $25
From first purchase: 2 units @ $3 per unit = $6
LIFO cost of goods sold: 7 units = $31
Ending inventory: 2 @ $2 + 1 @ $3 = $7
Average cost of goods sold (value the 7 units sold at the average unit cost of goods available).
Average unit cost = $38 / 10 = $3.80 per unit
Weighted average cost of goods sold = 7 @ $3.80 = $26.60
Ending inventory = 3 @ $3.80 = $11.40
جزاك الله خيرا على المعلومات المفيدة
Which of the following statements is TRUE? Income tax expense:
A. and income tax paid are similar.
B. is the reported net of deferred tax assets and liabilities.
C. is the amount of taxes due to the government.
D. includes taxes payable and deferred income tax expense.
D
Income tax expense is defined as expense resulting from current period pretax income. It includes taxes payable and deferred income tax expense. Income tax paid is the actual cash flow for income taxes, including payments or refunds for other years and may differ from income tax expense. Taxes payable are the amount of taxes due the government.
Which of the following statements is a CORRECT description of valuation allowance? Reserve:
A. created when deferred tax assets are greater than deferred tax liabilities.
B. against deferred tax liabilities based on the likelihood that those liabilities will be paid.
C. against deferred tax assets based on the likelihood that those assets will be realized.
D. created when deferred tax liabilities are greater than deferred tax assets.
C
Valuation allowance is a reserve against deferred tax assets based on the likelihood that those assets will be realized. Deferred tax assets reflect the difference in tax expense and taxes payable that are expected to be recovered from future operations.
A tax loss carryforward is the:
A. net taxable loss that can be used to refund paid taxes from the previous year.
B. difference of deferred tax liabilities and deferred tax assets.
C. net taxable loss that can be used to reduce taxable income in the future.
D. difference of taxes payable and income tax paid.
C
difference of taxes payable and income tax paid.
The difference in income tax expense and taxes payable is a:
A. deferred tax asset.
B. deferred income tax expense.
C. timing difference.
D. deferred tax liability.
B
Taxes payable is defined as the taxes due the government as determined by taxable income and the tax rate, while income tax expense is the amount actually recognized on the balance sheet. Deferred income tax expense is defined as the difference in income tax expense and taxes payable. Each individual deferred item is expected to be paid (or recovered) in future years.
Accelerated depreciation results in:
A. lower taxes in the early years that are not reversed in the future.
B. higher taxes in the early years that are then reversed in the future.
C. higher taxes in the early years that are not reversed in the future.
D. lower taxes in the early years that are then reversed in the future
d.
The following information is regarding as asset a firm purchased for $100,000.
• The asset has a 5-year useful life and no salvage value.
• The asset generates $30,000 of annual revenue for 5-years
• Tax rate is 35 percent.
• The business depreciates the asset over 4 years on a straight-line basis.
Taxes payable in year 5 are?
A. $5250.
B. $1750.
C. $10500.
D. $8750.
B
$30,000 revenue - $25,000 depreciation = $5,000 income
($5,000 income)(.35 tax rate) = $1750 taxes payable
When firms are deferring their tax liability what type of depreciation is present?
A. Straight line.
B. Depleted.
C. Illegal.
D. Accelerated.
D
1: Analysis of Financial Statements
a: Calculate, interpret, and discuss the uses of measures of a company’s internal liquidity, operating performance, risk profile, growth potential, and external liquidity.
Measures of a company’s internal liquidity
These ratios are the:
Current ratio = current assets / current liabilities.
Quick ratio = [cash + marketable securities + receivable] / current liabilities.
Cash ratio = [cash + marketable securities] / current liabilities.
The current, quick, and cash ratios differ only in the liquidity of the current assets that the analyst projects will be used to pay off the current liabilities. Other ratios ask:
a. Receivables turnover = sales / average receivables
b. Average receivables collection period = 365 / receivables turnover
a. Inventory turnover = cost of goods sold / average inventory
b. Average inventory processing period = 365 / inventory turnover
a. Payables turnover = cost of goods sold / average accounts payable
b. Average payment period = 365 / payables turnover
The cash cycle is the time period that exists from when the firm pays out money for the purchase of raw materials to when it gets the money back from the purchasers of the firm’s finished goods.
Cash conversion cycle = collection period + inventory period - payment period.
Example: Receivables turnover = 9, days receivables out (collection period) = 41 days, inventory turnover = 6, days inventory in stock (inventory period) = 61 days, payables turnover = 11, and days payables out (payment period) = 33 days. Cash conversion cycle = 41 days + 61 days - 33 days = 69 days.
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Measures of a company’s operating performance
Operating efficiency ratios question how efficiently management is using the assets they have at their disposal. Efficiency ratios are all sales to balance sheet item ratios.
• total asset turnover = sales / total assets
• fixed asset turnover = sales / fixed assets
• equity turnover = sales / equity
Operating profitability ratios look at how good management is at turning their efforts into profits.
Gross profit margin = gross profits / sales.
Operating profit margin = operating profit / sales, this ratio is also written as EBIT / sales
Net profit margin = EAT / sales, also know the before tax profit margin = EBT / sales
Return on total capital = [EAT + interest] / capital
Return on owners equity = ROE = EAT / equity