[Anonymous]

Fact Pattern: Rinker Corporation had 40,000 shares of common stock outstanding on November 30, Year 1. On May 20, Year 2, a 10% stock dividend was declared and distributed. On June 1, Year 2, Rinker issued options to its existing stockholders giving them the immediate right to acquire one additional share of stock for each share of stock held. The option price of the additional share was $6 per share, and no options have been exercised as of year end. The average price of Rinker’s common stock for the year was $20 per share. The price of the stock as of November 30, Year 2, the end of the fiscal year, was $30 per share, and the company’s net income for the fiscal year was $229,680. Rinker had no outstanding debt during the year, and its tax rate was 30%.

Question: 9 The diluted earnings per share (rounded to the nearest cent) of Rinker common stock for the fiscal year ended November 30, Year 2, was

A. $5.22 per share.

B. $3.07 per share.

C. $3.19 per share.

D. $3.73 per share.

Answer (D) is correct.

DEPS is net income available to common shareholders divided by the number of common shares outstanding after adjustment for all dilutive securities that could possibly be issued. DEPS is always equal to or less than BEPS. In this problem, the difference between BEPS and DEPS is the price used in the assumed treasury stock purchase. Under the “if-converted” method, the purchase of treasury stock from the hypothetical proceeds of the exercise of the 44,000 rights is presumed to be at the year-end market price, if higher than the average market price for the year. Thus, the $264,000 (44,000 shares × $6) available for treasury stock purchases will buy only 8,800 shares at the year-end price of $30 per share. Consequently, because 8,800 is 20% of the actual shares outstanding, no hypothetical proceeds must be used to reduce debt or purchase securities, and no numerator adjustment of net income is needed. The denominator will consist of the 44,000 actual shares assumed to be outstanding all year, plus 17,600 additional shares [(44,000 new shares – 8,800 treasury shares) × (6/12)]. The weighted average denominator of 61,600 shares is divided into the $229,680 of net income to give DEPS of $3.73.

**I’m not sure how they’re coming up with 44,000 shares if converted. Any ideas?

[How many letters do you need]

Allies: The 44,000 is just the 40,000 + 10% stock dividend (remember that stock dividends and splits are treated as entire year for EPS purposes)

MBA,CMA,CPA, CFF?, ABV?

[How many letters do you need]

Allies: The 44,000 is just the 40,000 + 10% stock dividend (remember that stock dividends and splits are treated as entire year for EPS purposes)

MBA,CMA,CPA, CFF?, ABV?

[Author]

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