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Chapter 5: Q7DQ (page 622)

Explain the difference between basic earnings per share and diluted earnings per share.

Short Answer

Expert verified

Answer

Basic earnings per share considers just those shares that are accessible for trading, that might be higher than a company's total number of outstanding shares. Diluted earnings per share is just a company's net income divided by its outstanding shares and convertible securities.

Step by step solution

01

Introduction to earnings per share

Earnings per share calculated on a quarterly or annual basis and it describes a public company's profit per outstanding share of stock.

02

The difference between basic earnings per share and diluted earnings per share

Dilutive earnings per share consider all of the potentially dilutive impacts of warrants, convertibles, and other securities that can create new shares of common stock.

More specifically, Basic earnings per share only uses number of sharses of common stock to estimate the per share earning.

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Most popular questions from this chapter

Question: Barton Simpson, the chief financial officer of Broadband Inc. could hardly believe the change in interest rates that had taken place over the last few months. The interest rate on A2 rated bonds was now 6 percent. The $30 million, 15-year bond issue that his firm has outstanding was initially issued at 9 percent five years ago. Because interest rates had gone down so much, he was considering refunding the bond issue. The old issue had a call premium of 8 percent. The underwriting cost on the old issue had been 3 percent of par, and on the new issue it would be 5 percent of par. The tax rate would be 30 percent and a 4 percent discount rate would be applied for the refunding decision. The new bond would have a 10-year life. Before Barton used the 8 percent call provision to reacquire the old bonds, he wanted to make sure he could not buy them back cheaper in the open market.

b. Compare the price in part a to the 8 percent call premium over par value. Which appears to be more attractive in terms of reacquiring the old bonds?

The Hardaway Corporation plans to lease a \(740,000 asset to the O鈥橬eil Corporation. The lease will be for 11 years.

b. If the Hardaway Corporation is able to take a 10 percent deduction from the purchase price of \)740,000 and will pass the benefits along to the O鈥橬eil Corporation in the form of lower lease payments, (related to the Hardaway Corporation in the form of lower initial net cost), how much should the revised lease payments be? The Hardaway Corporation desires a 13 percent return on the 11-year lease

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Question: The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders鈥� claims are also shown.

Assets

Book value

Liquidation value

Accounts receivables

\(1,400,000

\)1,200,000

Inventory

\(1,800,000

\)900,000

Machinery and equipment

\(1,100,000

\)600,000

Building and plant

\(4,200,000

\)2,500,000

Total assets

\(8,500,000

\)5,200,000

Liabilities and stockholder鈥檚 claims

Liabilities

Accounts payable

\(2,800,000

First lien, secured by machinery and equipment

\)900,000

Senior unsecured debt

\(2,200,000

Subordinated debenture

\)1,700,000

Total liabilities

\(7,600,000

Stockholder鈥檚 claims

Preferred stock

\)250,000

Common stock

\(650,000

Total stockholder鈥檚 claims

\)900,000

Total liabilities and stockholder鈥檚 claims

$8,500,000

d. After the machinery and equipment are sold to partially cover the first lien secured claim, how much will be available from the remaining asset liquidation values to cover unsatisfied secured claims and unsecured debt?
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