Two Different Companies Have Many Similarities,including the Following

question 61

Essay

Two different companies have many similarities,including the following:
• They all earned net income of $3,500,000 for the year ended December 31,2017;
• They are all subject to a 35% tax rate;
• The average price of the companies' ordinary shares during the year was $26; and
• Each company had 1,400,000 ordinary shares outstanding during the year.
They do have slightly different complex capital structures,however.Specifically:
• Company Black had stock options outstanding the entire year that allowed employees to buy 10,000 ordinary shares for $22 each between January 1,2018 and December 31,2019.
• Company Clark had $4,000,000 in 4% non-cumulative preferred shares outstanding the entire year.Each $100 share is convertible into three ordinary shares.Dividends were not declared in 2017.
Requirements:
a.Calculate the basic EPS of the four companies.
b.Prepare a schedule that sets out the income effect,share effect,and incremental EPS for each company's security that is convertible into ordinary shares.
c.Consider each company's POS and determine whether it is dilutive or anti-dilutive.

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Definitions:

Utility Maximizing

Acting in a way to achieve the highest level of satisfaction possible with available resources.

Demand For Labor

The total amount of labor that employers want to hire at various wage rates, contingent on factors such as technology, the price of the goods being produced, and the availability of other inputs.

Reduced Wage

A wage that is decreased from a previous level, often due to economic pressures or changes in job responsibilities.

Income Effect

The alteration in a person's or economic system's earnings and the effect of this alteration on the demand for a particular product or service.