173 CHAPTER 10 Problem 10-1 Book value per share (8,800,000 / 50,000) 176 Problem 10-2 Excess Ordinary a Balances 12% x 1,000,000 x 12% x 4,000,000 480,000 Balance for participation 3,000,000 1,000,000 4,000,000 ( 240,000) 240,000 ( 480,000) 2,280,000 Total Divide by shares outstanding 40,000 Book value per share 157.60 b Balances 12% x 1,000,000 x 15% x 4,000,000 600,000 Balance for participation 4% x 1,000,000 2,240,000 Total Divide by shares 456,000 1,824,000 1,696,000 6,304,000 10,000 169.60 3,000,000 1,000,000 4,000,000 ( 240,000) 240,000 ( 600,000) 2,160,000 Total Divide by shares Book value per share 158.20 c Balances 12% x 1,000,000 x 12% x 4,000,000 480,000 Balance for participation Preference 432,000 1,728,000 1,672,000 6,328,000 10,000 40,000 167.20 3,000,000 1,000,000 4,000,000 ( 240,000) 240,000 ( 480,000) 2,280,000 40,000 1,280,000 10,000 6,720,000 40,000 Book value per share 168 128 174 Excess Ordinary d Balances 12% x 1,000,000 x To ordinary 2,760,000 3,000,000 1,000,000 4,000,000 ( 240,000) 240,000 2,760,000 _ Total Divide by shares Book value per share 169 e Balances 12% x 1,000,000 To ordinary 2,880,000 Preference 1,240,000 6,760,000 10,000 40,000 124 3,000,000 1,000,000 4,000,000 ( 120,000) 120,000 2,880,000 _ Total Divide by shares Book value per share 172 1,120,000 6,880,000 10,000 40,000 112 Problem 10-3 Excess Ordinary a Balances 4,000,000 12% x 2,000,000 x To ordinary (1,620,000) Total Divide by shares ( 900,000) Preference 2,000,000 ( 720,000) (1,620,000) 720,000 _ 2,720,000 40,000 2,380,000 40,000 Book value per share 59.50 68 b Balances 4,000,000 Prorata sharing ( 600,000) ( 900,000) 900,000 Total Divide by shares Book value per share 2,000,000 ( 300,000) 1,700,000 3,400,000 40,000 40,000 42.50 85 175 Problem 10-4 Excess Ordinary Balances Liquidation premium (40,000 x 3) Preference dividend (12% x 2,000,000) To ordinary Total Divide by shares Book value per share 86.40 Preference 4,000,000 2,000,000 5,000,000 ( 120,000) 120,000 ( 240,000) 240,000 3,640,000 _ 3,640,000 2,360,000 8,640,000 40,000 100,000 59 In the absence of a contrary statement, the preference share is noncumulative and nonparticipating Problem 10-5 6% Preference dividends (6% x 3,000,000 x years) 540,000 8% Preference dividends (8% x 2,000,000) 160,000 Total preference dividends 700,000 Excess 6% 8% over par Ordinary Preference as to assets: Balances 5,000,000 Preference dividends Balance to ordinary ( 170,000) 530,000 Preference 3,000,000 (700,000) (170,000) Total 4,830,000 Divide by shares outstanding 50,000 Book value per share 96.60 540,000 _ Preference 2,000,000 160,000 _ 3,540,000 2,160,000 30,000 20,000 118 Preference as to dividends: Balances 5,000,000 Prior years’ preference dividends (6% x 3,000,000 x years) Balance 530,000 3,000,000 360,000 170,000 6% Preference (180,000 / 340,000 x 170,000) 8% Preference (160,000 / 340,000 x 170,000) Total 5,000,000 Divide by shares outstanding 50,000 Book value per share 100 108 2,000,000 360,000 90,000 _ 80,000 3,450,000 2,080,000 30,000 20,000 115 104 176 Problem 10-6 Preference Shares Amount Amount Issued 3,000,000 Add: Subscribed 500,000 Total 3,500,000 Less: Treasury 100,000 Issued and outstanding 3,400,000 Ordinary Shares 15,000 1,500,000 30,000 2,000 200,000 5,000 17,000 1,700,000 35,000 1,000 100,000 1,000 16,000 1,600,000 34,000 Preference share capital Share premium Treasury preference share 100,000 10,000 Ordinary share capital Treasury ordinary share Share premium 100,000 110,000 70,000 30,000 Share premium (300,000 – 10,000 + 30,000) Retained earnings unrestricted Retained earnings appropriated 680,000 Total excess over par 1,968,000 320,000 968,000 Excess Ordinary Balances 3,400,000 12% x 1,600,000 x 12% x 3,400,000 408,000 Balance for participation 1,968,000 Preference 1,600,000 ( 960,000) ( 408,000) 960,000 600,000 16 / 50 x 600,000 34 / 50 x 600,000 408,000 Total 4,216,000 Divide by shares outstanding 34,000 Book value per share 124 192,000 _ 2,752,000 16,000 172 Problem 10-7 Total shareholders’ equity Less: Preference shareholders’ equity: Preference share capital Preference dividends (8% x 1,000,000 x 2) 1,160,000 Ordinary shareholders’ equity 2,660,000 3,820,000 1,000,000 160,000 177 Book value per share: Preference (1,160,000 / 10,000 shares) 116 Ordinary (2,660,000 / 20,000 shares) 133 Ordinary shares issued Less: Treasury shares 2,000 Outstanding ordinary shares 22,000 20,000 Problem 10-8 Ordinary issued 2,000,000 Subscribed Total Less: Treasury 500,000 Outstanding Shares 20,000 Amount 10,000 30,000 5,000 1,000,000 3,000,000 25,000 2,500,000 Share premium (300,000 + 100,000 gain on treasury share) 400,000 Retained earnings Total excess Excess Ordinary Balances 2,500,000 12% x 1,500,000 x 12% x 2,500,000 300,000 Balance for participation 15 / 40 x 1,600,000 25 / 40 x 1,600,000 1,000,000 Total 3,800,000 Divide by shares outstanding 25,000 Book value per share 152 2,440,000 2,040,000 2,440,000 Preference 1,500,000 ( 540,000) ( 300,000) 540,000 1,600,000 600,000 _ 2,640,000 15,000 176 Problem 10-9 Annual preference dividend (12% x 2,000,000) 240,000 Paid in 2007 Balance in 2007 40,000 Dividend in 2008 240,000 Total preference dividends in 2008 280,000 200,000 178 Total dividends paid in 2008 Less: Preference dividends paid in 2008 280,000 Ordinary dividends 320,000 600,000 Problem 18-10 Net income 2007 and 2008 1,610,000 Net loss 2004, 2005 and 2006 ( 600,000) Retained earnings – maximum dividend 1,010,000 Balance 10% x 500,000 12% x 1,000,000 x 10% x 1,500,000 150,000 Balance / 30 x 210,000 10 / 30 x 210,000 15 / 30 x 210,000 105,000 Total dividends 255,000 Retained 10% 12% earnings Preference Preference Ordinary 1,010,000 ( 50,000) 50,000 ( 600,000) 600,000 ( 150,000) 210,000 35,000 85,000 70,000 _ 670,000 Problem 10-11 Preference dividend (15% x 2,500,000) 375,000 Ordinary dividend (200,000 x 5) 1,000,000 Maximum dividend 1,375,000 Problem 10-12 Answer D Total shareholders’ equity Preference shareholders’ equity: Preference share capital Preference dividends in arrears Liquidation premium 3,250,000 Ordinary shareholders’ equity 7,000,000 Divide by ordinary shares outstanding 100,000 Book value per ordinary share 10,025,000 2,500,000 250,000 500,000 70.00 179 Problem 10-13 Answer B Total shareholders’ equity Preference shareholders’ equity: Preference share capital Preference dividends for 2000 (1,000,000 x 8%) Liquidation premium (20,000 x 5) 1,180,000 Ordinary shareholders’ equity 2,720,000 Divide by ordinary shares outstanding 100,000 Book value per ordinary share 3,900,000 1,000,000 80,000 100,000 27.20 Problem 10-14 Answer B Total shareholders’ equity Preference shareholders’ equity: Preference share capital Liquidation premium (10,000 x 5) 1,050,000 4,950,000 1,000,000 50,000 Ordinary shareholders’ equity 3,900,000 Divide by ordinary shares outstanding 30,000 Book value per ordinary share 130 Problem 10-15 Answer A Total shareholders’ equity Preference shareholders’ equity: Preference share capital Preference dividend (500,000 x 8%) 540,000 Ordinary shareholders’ equity 1,068,000 Divide by ordinary shares 89,000 Book value per ordinary share 1,608,000 500,000 40,000 12 Ordinary shares issued Less: Treasury shares 1,000 Outstanding 90,000 89,000 Problem 10-16 Answer B Total dividend declared in 2008 Preference dividends: In arrears on December 31, 2007 2008 (6% x 4,000,000) 360,000 Balance to ordinary share 440,000 120,000 240,000 80,000 180 Problem 10-17 Answer D Preference share capital (30,000 x 100) 3,000,000 Preference dividend in 2007 (3,000,000 x 5%) 150,000 Preference dividend in 2008 Total preference dividends 300,000 Less: Preference dividend paid in 2008 150,000 100,000 Preference dividends in arrears – December 31, 2008 200,000 A dividend is not a liability until it is legally declared Accordingly, the preference dividends in arrears of P200,000 on December 31, 2008 shall be disclosed only Problem 10-18 Answer C Dividend Ordinary Balance 10% x 3,000,000 10% x 2,000,000 200,000 Balance for participation 1,000,000 ( 300,000) ( 200,000) Preference 300,000 500,000 3,000,000 / 5,000,000 x 500,000 2,000,000 / 5,000,000 x 500,000 200,000 300,000 _ 600,000 400,000 Problem 10-19 Answer C Total shareholders’ equity Preference shareholders’ equity: Preference share capital (500 x P1,000) Liquidation premium (500 x P400) 700,000 Ordinary shareholders’ equity 2,900,000 Divide by ordinary shares Book value per ordinary share 3,600,000 500,000 200,000 5,000 580 181 Problem 10-20 Answer A Preference share capital 1,000,000 Shares issued through exercise of rights 120,000 Total shares outstanding 720,000 Theoretical value of stock ex-right (7,200,000 / 720,000) 10 Adjustment factor (11/10) 1.10 2008 Shares outstanding Adjustment factor Adjusted shares 660,000 600,000 1.10 Basic EPS (11,000,000 / 660,000) 16.67 2009 January 110,000 March Total (600,000 x 1.10 x 2/12) (720,000 x 10/12) 600,000 710,000 Basic EPS (15,000,000 / 710,000) 21.13 2010 Basic EPS (18,000,000 / 720,000) 25.00 192 Problem 11-20 Ordinary shares – 01/01/2008 1,000,000 April (50,000 x 9/12) July (50,000 x 6/12) Total Basic EPS (5,900,000 / 1,062,500) 5.55 Ordinary shares – 01/01/2008 1,000,000 37,500 25,000 1,062,500 April – new branch 50,000 July – new branch 50,000 December 31 – net income in excess of P5,000,000 (900 x 1,000) 900,000 Total 2,000,000 Diluted EPS (5,900,000 / 2,000,000) 2.95 Problem 11-21 Answer A Net income Less: Preference dividend Net income to ordinary share 630,000 750,000 120,000 Basic EPS (630,000 / 60,000) 10.50 Problem 11-22 Answer A January 120,000 June 30 30,000 150,000 80,000 + 40,000 40,000 + 20,000 x 6/12 Average shares Basic EPS (2,400,000 / 150,000) 16 Problem 11-23 Answer C January 396,000 March 90,000 July 48,000 33,000 x 12 months 9,000 x 10 months 8,000 x months 534,000 Average number of shares (534,000 / 12) 44,500 193 Problem 11-24 Answer C January 300,000 + 30,000 x 12 months 3,960,000 October 24,000 x months ( 72,000) 3,888,000 Average number of shares (3,888,000 / 12) 324,000 Problem 11-25 Answer B January 100,000 x x 1.20 June 30,000 x 1.20 x 7/12 Average number of shares 240,000 21,000 261,000 Problem 11-26 Answer B January (100,000 x x 1.20 x 3) April (30,000 x x 1.20 x x 9/12) 162,000 June 30 (10,000 x 1.20 x x 6/12) ( 18,000) Average shares 720,000 864,000 Problem 11-27 Answer A January (44,000 x 1.25 x 3) 1,650,000 February (56,000 x 1.25 x x 11/12) 192,500 May (25,000 x 1.25 x x 8/12) 62,500) September (10,000 x x 4/12) 10,000 Average shares ( 305,000 Problem 11-28 Question Answer A 2008 January 900,000 March October December 3,750) (250,000 x 1.20 x 3) (24,000 x 1.20 x x 10/12) (16,000 x x 3/12) (15,000 x x 1/12) 72,000 12,000 ( Average shares 980,250 194 Question Answer A 2009 January (329,800 x 3) 989,400 September (60,000 x4/12) Average shares January 1, 2008 (250,000 x 1.20) 300,000 March 1, 2008 (24,000 x 1.20 x x 10/12) October 1, 2008 (16,000 x x 3/12) December 1, 2008 (15,000 x x 1/12) 15,000) Shares actually outstanding – January 1, 2009 329,800 20,000 1,009,400 28,800 16,000 ( Problem 11-29 Answer B Net income Less: Preference dividend for one year (2,500,000 x 4%) 100,000 Net income to ordinary share 4,900,000 Basic EPS (4,900,000 / 200,000) 5,000,000 24.50 Problem 11-30 Answer A Ordinary shares issued (30,000,000 / P100) 300,000 Treasury shares Ordinary shares outstanding Net income Less: Preference dividend (10% x 5,000,000) 500,000 Net income to ordinary share 14,500,000 Basic EPS (14,500,000 / 250,000) ( 50,000) 250,000 15,000,000 58 Problem 11-31 Answer B December 31, 2008 balance July 1, 2009 2-for-1 share split Total ordinary shares – December 31, 2008 200,000 2008 EPS (350,000 / 200,000) 100,000 100,000 1.75 195 January 1, 2009 200,000 x 12/12 200,000 April 1, 2009 20,000 x x 9/12 30,000 Average number of shares 230,000 2009 EPS (410,000 / 230,000) 1.78 Problem 11-32 Fair value of shares (100,000 x P35) 3,500,000 Proceeds from exercise of rights (100,000 / = 25,000 x P30) 750,000 Total Ordinary shares outstanding Ordinary shares issued through exercise of rights (100,000 / 4) 25,000 Total ordinary shares Theoretical value of share ex-right (4,240,000 / 125,000) Another approach 35 - 30 Theoretical value of right = 4+1 = 4,250,000 100,000 125,000 34 = Market value of share right-on Theoretical value of right Market value of share ex-right 35 34 Problem 11-33 Answer A Fair value of shares outstanding (100,000 x 16) 1,600,000 Proceeds from exercise of rights (100,000 / = 20,000 x 10) 200,000 Total 1,800,000 196 Ordinary shares outstanding Ordinary shares issued through exercise of rights (100,000 / 5) 20,000 Total ordinary shares Theoretical value of share ex-right (1,800,000 / 120,000) Adjustment factor or fraction January 80,000 October 30,000 100,000 120,000 15 16/15 (100,000 x 16/15 x 9/12) (120,000 x 3/12) Total average shares Basic EPS (5,500,000 / 110,000) 110,000 50 Problem 11-34 Answer A The theoretical value of a right is computed as follows: 160 – 100 = 5+1 60 = P10 per right Market value of share right-on Theoretical value of right 160 10 Market value of share ex-right 150 Adjustment factor 160/150 Ordinary shares on January 300,000 Ordinary shares issued through exercise of rights on March 31 (300,000 / 5) Total ordinary shares on March 31 January 300,000 x 160/150 x 3/12 80,000 March 31 360,000 x 9/12 Average number of shares 350,000 Basic EPS (6,000,000 / 350,000) 60,000 360,000 270,000 17.14 197 Problem 11-35 Answer B 35 - 10 Theoretical value of right = 4+1 = Market value of share right-on Theoretical value of right Market value of share ex-right Adjustment factor Ordinary shares on January 600,000 Ordinary shares issued through exercise of rights on October (600,000 / 4) Total ordinary shares on October 750,000 35 30 35/30 150,000 January 600,000 x 35/50 x 9/12 525,000 March 31 750,000 x 3/12 Average number of ordinary shares 187,500 712,500 Basic EPS (8,550,000 / 712,500) 12.00 Problem 11-36 Answer D Ordinary shares outstanding Ordinary shares to be issued in the acquisition of subsidiary 50,000 Total ordinary shares 1,200,000 Net income Less: Preference dividend Net income to ordinary share 3,200,000 3,400,000 200,000 1,250,000 Diluted earnings per share (3,200,000 / 1,250,000) 2.56 Problem 11-37 Answer B Ordinary shares outstanding 200,000 Ordinary shares to be issued for conversion of preference (20,000 x 5) 100,000 Total ordinary shares 300,000 198 Diluted EPS (840,000 / 300,000) 2.80 Problem 11-38 Question Answer D January Outstanding September Conversion (10,000 x x 4/12) 20,000 Average number of shares 120,000 Net income 100,000 2,000,000 Preference dividend (5% x 1,000,000) 50,000) Net income to ordinary share 1,950,000 ( Basic EPS (1,950,000 / 120,000) 16.25 Question Answer A January Outstanding September Conversion (10,000 x 6) 60,000 Total ordinary shares 100,000 160,000 Diluted EPS (2,000,000 / 160,000) 12.50 The issuance of ordinary shares on September is not “averaged” anymore because the convertible preference shares are outstanding on January Problem 11-39 Answer C January 500,000 x 500,000 October 120,000 x 3/12 January 100,000 x 100,000 Average ordinary shares 30,000 630,000 Problem 11-40 Answer B January 2,500,000 2,500,000 April 500,000 375,000 July 250,000 125,000 October 200,000 50,000 Average shares x1 x 9/12 x 6/12 x 3/12 3,050,000 199 Problem 11-41 Answer A Ordinary shares actually outstanding 100,000 Ordinary shares issued through actual bond conversion (200 x 200) 40,000 Total ordinary shares Net income Add: Interest on bonds (2,000,000 x 7% x 6/12) Less: Income tax – 35% 45,500 Adjusted income 140,000 5,554,500 70,000 24,500 5,600,000 Diluted EPS (5,600,000 / 140,000) 40 Problem 11-42 Question Answer C January Outstanding October Conversion (4,000 x 40 x 3/12) 40,000 Average number of shares 240,000 200,000 Basic EPS (5,000,000 / 240,000) 20.83 Question Answer A January Outstanding October Conversion (4,000 x 40) 160,000 Total ordinary shares 200,000 360,000 The issuance of ordinary shares on October is not “averaged” anymore because the convertible bonds are outstanding on January Net income Interest on bonds net of tax from January to October (4,000,000 x 10% x 9/12 x 65%) 195,000 Adjusted income Divide by ordinary shares Diluted EPS 5,000,000 5,195,000 360,000 14.43 The after-tax actual interest paid on the bonds up to the date of conversion is added back to net income 200 Problem 11-43 Question Answer A January Outstanding May (60,000 x 8/12) July (100,000 x 6/12) 50,000) October (2,000 x 80 x 3/12) Average number of shares 830,000 800,000 40,000 ( 40,000 Basic EPS (9,500,000 / 830,000) 11.45 Question Answer A January Outstanding January (5,000 bonds x 80) 400,000 May (60,000 x 8/12) July (100,000 x 6/12) 50,000) Average number of shares 1,190,000 800,000 40,000 ( All of the 5,000 bonds are assumed to be converted on January because the convertible bonds are outstanding on January Net income Interest on bonds actually converted on October (2,000,000 x 12% x 9/12) Interest on bonds not converted (3,000,000 x 12%) Total interest Tax effect (35% x 540,000) 351,000 Adjusted income Diluted EPS (9,851,000 / 1,190,000) 9,500,000 180,000 360,000 540,000 (189,000) 9,851,000 8.28 Problem 11-44 Answer B Ordinary shares outstanding on January 300,000 Ordinary shares issued on July (50,000 x 6/12) 25,000 Share warrants outstanding Assumed treasury shares (600,000 / 20) ( 30,000) Average shares 40,000 335,000 201 Problem 11-45 Answer A Ordinary shares outstanding Share options Assumed treasury shares (40,000 x 10 = 400,000 / 16) 25,000) Total ordinary shares 100,000 40,000 ( 115,000 Diluted EPS (2,000,000 / 115,000) 17.39 Problem 11-46 Question Answer B Ordinary shares outstanding Exercise of share options on April (40,000 x 9/12) 30,000 Average number of shares 130,000 100,000 Basic EPS (2,000,000 / 130,000) 15.38 Question Answer A Share options Assumed treasury shares (40,000 x 10 = 400,000 / 16) (25,000) Potential ordinary shares 40,000 15,000 Note that the share price of P16 on exercise date on April is used in computing the assumed treasury shares Outstanding shares on January Exercise of shares options on April 30,000 100,000 Potential shares from January to April (15,000 x 3/12) 3,750 Average number of shares 133,750 Diluted EPS (2,000,000 / 133,750) 14.95 Problem 11-47 Answer B Ordinary shares outstanding million Potential ordinary shares (4 million x 2) million Total ordinary shares million 10 18 202 Net income million Interest expense on bonds (10% x P30 million) million Adjusted income million 33 36 Diluted EPS (36 / 18) 2.00 Problem 11-48 Answer C Net income Preference dividend (20,000 x P5) (100,000) Net income to ordinary share 550,000 650,000 Basic EPS (550,000 / 110,000) Basic EPS 5.00 Share options Diluted EPS 4.78 5.00 Net income 550,000 550,000 Shares 110,000 5,000 115,000 EPS Preference share Diluted EPS 4.19 Bond payable Diluted EPS 4.22 100,000 40,000 650,000 155,000 130,000 30,000 780,000 185,000 The diluted EPS to be reported should be P4.19 The convertible bonds are ignored because the effect is antidilutive Notice there is an increase from P4.19 to P4.22 Problem 11-49 Answer C Exercise price (20,000 x P350) 7,000,000 It is assumed that sufficient number of ordinary shares shall be issued at the average market price to cover the amount of P7,000,000 Ordinary shares assumed to be issued (7,000,000 / P280) 25,000 Ordinary shares to be reacquired under the written put options 20,000 Incremental ordinary shares 5,000 203 Problem 11-50 Answer A Basic earnings per share Effect of possible bond conversion ( 8) Diluted earnings per share 150 142 The effect of the possible exercise of ordinary share options is ignored because it increases earnings per share and therefore it is antidilutive Problem 11-51 Answer A The maximum amount of earnings per share is equal to the basic earnings per share On the other hand the minimum amount is equal to the diluted earnings per share computed as follows: Basic earnings per share Effect of possible conversion of preference share Effect of possible exercise of ordinary share warrants ( 2) Diluted EPS ( 120 1) 117 ... 2,880,000 Fraction 25/100 75/100 184 CHAPTER 11 Problem 11- 1 D B D A D 10 A B B B A Problem 11- 2 11 D 12 A 13 B 14 A 15 B C B B B A B A A C 10 A Problem 11- 3 Basic earnings per share: Income from... 2,000,000 x 9/12) Less: Income tax – 35% 117 ,000 Adjusted income 100,000 115 ,000 2,758,000 180,000 63,000 2,875,000 Diluted EPS (2,875,000 / 115 ,000) 25 Problem 11- 13 January (100,000 x 12) 1,200,000... Divide by shares Book value per share 172 1,120,000 6,880,000 10,000 40,000 112 Problem 10-3 Excess Ordinary a Balances 4,000,000 12% x 2,000,000 x To ordinary (1,620,000) Total Divide by shares