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Comprehensive Question Bank EPS

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Comprehensive Question Bank EPS

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divyanshgeu
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© © All Rights Reserved
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Comprehensive Question Bank: Earnings Per Share (EPS)

Chapter 14: Earnings Per Share (EPS)

This question bank includes comprehensive numerical problems and detailed

solutions

to help students prepare for exams. The problems cover Basic EPS, Diluted

EPS, Stock

Splits, Convertible Securities, and more complex scenarios.

--------------------------

Question 1: Basic EPS with Weighted Average Shares

--------------------------

XYZ Ltd. has a net income of INR750,000. It had 200,000 shares outstanding at

the beginning

of the year. On April 1, the company issued 100,000 shares. On October 1, it

bought back

50,000 shares. Calculate the Basic EPS for the year.

Solution:

1. Net Income = INR750,000

2. Weighted Average Shares:

- Shares from Jan 1 to Mar 31 (3 months): 200,000 x 3/12 = 50,000

- Shares from Apr 1 to Sep 30 (6 months): 300,000 x 6/12 = 150,000

- Shares from Oct 1 to Dec 31 (3 months): 250,000 x 3/12 = 62,500

Total Weighted Shares = 50,000 + 150,000 + 62,500 = 262,500

3. Basic EPS = Net Income / Weighted Average Shares = INR750,000 / 262,500 =


INR2.86

--------------------------

Question 2: Diluted EPS with Convertible Bonds

--------------------------

ABC Ltd. has a net income of INR1,200,000 and 500,000 shares outstanding. It

also has

INR600,000 of convertible bonds, which are convertible into 60,000 shares. The

interest

expense on the bonds (net of tax) is INR48,000. Calculate Diluted EPS.

Solution:

1. Adjusted Net Income = INR1,200,000 + INR48,000 = INR1,248,000

2. Total Shares = 500,000 + 60,000 = 560,000

3. Diluted EPS = Adjusted Net Income / Total Shares = INR1,248,000 / 560,000 =

INR2.23

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Question 3: Stock Split Adjustment

--------------------------

DEF Ltd. reported a net income of INR900,000. It had 400,000 shares at the

beginning

of the year and declared a 3-for-1 stock split on July 1. Calculate the Basic EPS.

Solution:

1. Adjusted Shares Due to Stock Split = 400,000 x 3 = 1,200,000

2. Weighted Average Shares:


- Before Split (6 months): 400,000 x 6/12 = 200,000

- After Split (6 months): 1,200,000 x 6/12 = 600,000

Total Weighted Shares = 200,000 + 600,000 = 800,000

3. Basic EPS = Net Income / Weighted Average Shares = INR900,000 / 800,000 =

INR1.13

--------------------------

Question 4: Treasury Stock Method for Stock Options

--------------------------

GHI Ltd. has a net income of INR1,000,000 and 300,000 shares outstanding. It

also has

stock options for 50,000 shares at an exercise price of INR20. The average

market price

of the stock is INR40. Calculate Diluted EPS using the Treasury Stock Method.

Solution:

1. Total Proceeds from Options = 50,000 x INR20 = INR1,000,000

2. Shares Repurchased = Total Proceeds / Market Price = INR1,000,000 / INR40 =

25,000

3. Net Additional Shares = 50,000 - 25,000 = 25,000

4. Total Shares = 300,000 + 25,000 = 325,000

5. Diluted EPS = Net Income / Total Shares = INR1,000,000 / 325,000 = INR3.08

--------------------------

Additional Practice Questions:

1. A company has INR2,500,000 net income, 600,000 shares, INR400,000

convertible bonds
(convertible into 50,000 shares). Interest expense (net of tax) is INR30,000.

Calculate Diluted EPS.

2. Adjust EPS for a stock dividend of 10% declared mid-year, with INR800,000

net income and

400,000 shares outstanding.

3. Calculate EPS for a firm with INR1,200,000 net income, non-cumulative

preferred dividends

of INR200,000, and 500,000 common shares.

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