1. Love Bakery Corporation had 100,000 common shares outstanding as of 1/1/14. D
ID: 2962006 • Letter: 1
Question
1. Love Bakery Corporation had 100,000 common shares outstanding as of 1/1/14. During 2014, the following transactions affected the common stock.
March 1, issued 5,000 shares
April 1, acquired 3,500 shares
July 1, issued a 2-for-1 stock split
Love Bakery Corp also has preferred stock of 15,000 shares outstanding at $50 par and 10% stock.
a. Determine the weighted-average number of shares outstanding as of 12/31/14. Round to the nearest whole number.
b. Assuming that Love Bakery Corp earned income of $400,000 during 2014 and its preferred stock was noncumulative and no dividend was given, what would the earnings-per-share be? Round to the nearest 2 decimal place.
c. Assuming that Love Bakery Corp earned income of $400,000 during 2014 and its preferred stock was cumulative and dividends were given, what would the earnings-per-share be? Round to the nearest 2 decimal place.
Explanation / Answer
A. Dates---- Number of shares ----Fraction -------WA
Jan 1st to Feb end--100,000 x 2 = 200,000--- 2/12---- 33,333.33
March 1st to March end ---(100,000 + 5000) x 2 = 210,000 --1/12 --17,500
April 1st to Dec end-- (105,000+ 3500) x 2 = 217,000-- 9/12--- 162,750
Total weighed average(rounded)= 213583
Important: Multiplication factor in no.of shares is because of 2 to 1 split. When a 2to1 split occures, even in the middle of the year, entire period shares will be doubled. If any doubt in this case you can ask me.
B. Total Earned Income: $ 400,000
Since no dividend is paid on preferred stock as they are non cumulative.
Earnings per share = 400000/213583 = $ 1.87 (rounded to two decimal)
C. Dividend paid on preferred stock = 10% * 50 *15000 = $75,000
Earnings available for common stock = Total corporate income
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