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B-15.06 Earnings per share Trinity Railway

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Trinity Railway began 20X5 with 900,000 shares of common stock outstanding. On March 1, 20X5, Trinity Railway issued 300,000 additional shares of common stock. 50,000 shares of common stock were reacquired on October 1. Trinity Railway reported net income of $2,275,000 for the year ending December 31, 20X5. Trinity Railway paid $250,000 in common dividends during 20X5. B-15.05 Concepts including OCI/ROA/EBIT/EBITDA/etc. B-15.06 Earnings per share (a) Calculate the weighted-average common shares outstanding for 20X5. (b) Calculate basic earnings per share for 20X5.

 
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B-15.05 Concepts including OCI/ROA/EBIT/EBITDA/etc

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Three of the following statements are patently false. Find the three false statements. The other statements are true, and may include additional insights beyond those mentioned in the textbook. “Earnings” is synonymous with “income from continuing operations plus or minus the effects of any discontinued operations or extraordinary items.” Changes in accounting estimates must be reported by retrospective adjustment. EBIT and EBITDA are accounting values that are required to be reported on the face of the income statement. Other comprehensive income can be reported on the face of a statement of comprehensive income or in a separate reconciliation. When there is reported change in value for available for sale securities, “comprehensive income” becomes synonymous with “net income.” Book value per share is an amount related to shares of common stock.

 
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Equity structure and impact I-14.01 Equity structure and impact I-14.01

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Summary information for Branford Corporation’s balance sheet follows: BRANFORD CORPORATION Balance Sheet August 15, 20X4 Assets Cash $ 125,000 Accounts receivable 250,000 Inventory 750,000 Property, plant, & equipment (net) 860,000 Total assets $1,985,000 Liabilities Accounts payable $125,000 Accrued liabilities 260,000 Notes payable 290,000 Total liabilities $ 675,000 Stockholders’ equity Common stock, $5 par $700,000 Paid-in capital in excess of par 300,000 Retained earnings 310,000 Total stockholders’ equity 1,310,000 Total liabilities and equity $1,985,000 Branford’s business is growing rapidly, and the company needs to expand its manufacturing facilities. This expansion will require the company to obtain an additional $1,000,000 in cash. The company is exploring five alternatives to obtain the necessary capital:

DEBT OPTION: Branford is able to borrow, on a 5-year note, the full amount needed. The interest rate on this note would be 7%, and the note would require monthly payments. COMMON STOCK OPTION: Branford has identified an investor who is willing to pay $1,000,000 for 40,000 newly issued common shares. Common shares have been paying a dividend of $0.50 per share. Branford anticipates that this dividend rate will be maintained. NONCUMULATIVE PREFERRED STOCK OPTION: Branford has identified a hedge fund that will pay $1,000,000 for 8% noncumulative preferred stock to be issued at par. CUMULATIVE PREFERRED STOCK OPTION: Branford has identified an insurance company that will pay $1,000,000 for 6% cumulative preferred stock to be issued at par. CONVERTIBLE PREFERRED STOCK OPTION: Branford has identified a retirement fund that will pay $1,000,000 for 4% cumulative preferred stock to be issued at par. The preferred stock must be convertible into 25,000 shares of common stock at the option of the retirement fund. (b) Which of the alternative financing scenarios involve fixed committed payments to investors, and which involve discretionary payments? (c) Which one of the alternative financing scenarios presents the least risk to existing shareholders? Which one of the scenarios involves the most ownership dilution for existing shareholders?

 
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B-14.07 Stock dividends and splits

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Magic Blade’s stock has risen rapidly to $50 per share. The increase is due to excitement about its new knife that uses a light beam to slice fruits and vegetables. This process enhances the final appearance and quality of salads and fruit trays. The board of directors is considering strategies to divide the corporate ownership into more shares of stock, and bring about some reduction in the price per share. They are considering a stock split, small stock dividend, or large stock dividend. The board is unsure of the accounting effects of such transactions, and has requested information about how stockholders’ equity would be impacted. Prior to the contemplated stock transaction, equity consisted of: Stockholders’ Equity Common stock, $2 par value, 2,000,000 shares authorized, 500,000 shares issued and outstanding $1,000,000 Paid-in capital in excess of par 2,000,000 Retained earnings 6,000,000 Total stockholders’ equity $9,000,000 (a) Assuming the board were to declare a 2 for 1 split, how would the revised stockholders’ equity appear? (b) Assuming the board were to declare a 15% stock dividend, how would the revised stockholders’ equity appear?

 
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