Two Different Companies Have Many Similarities,including the Following

question 45

Essay

Two different companies have many similarities,including the following:
• They both earned net income of $3,500,000 for the year ended December 31,2017;
• They are both 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.
Required:
a.Calculate the basic EPS of both 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 antidilutive.

---

Definitions:

Efficient Outcome

A situation where resources are allocated in a way that maximizes net benefits to society and cannot be improved upon by making any one individual better off without making someone else worse off.

Simultaneous Move Game

A strategic situation where all players make their moves at the same time without knowledge of the others' choices.

Centralized Purchasing

The process where one central department within an organization is responsible for making all purchasing decisions to achieve efficiencies and cost savings.

Equilibrium

A situation where the equilibrium of market forces of supply and demand results in stable prices.