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E16-28 (L05) (EPS with Warrants) Howat Corporation earned \(360,000 during a period when it had an average of 100,000 shares of common stock outstanding. The common stock sold at an average market price of \)15 per share during the period. Also outstanding were 15,000 warrants that could be exercised to purchase one share of common stock for $10 for each warrantexercised.

Instructions

(a) Are the warrants dilutive?

(b) Compute basic earnings per share.

(c) Compute diluted earnings per share.

Short Answer

Expert verified
  1. Yes, the warrants are dilutive.
  2. Basic Earnings per share $3.60
  3. Diluted Earnings per Share $3.43

Step by step solution

01

(a) Explanation on dilutive warrants

The warrants are dilutive in light of the fact that it allows its holders to change over it into a common stock. Also the option price of $10 is lower than the average market price of $15.

02

(b) Computation of basic earnings per share:

Net Income

$360,000

Average share outstanding

100,000

Basic Earnings Per share

$3.60

03

Computation of Diluted Earnings Per Share:

Incrementalshare=Marketprice-OptionPriceMarketprice×Numberofwarrants=15-1015×15,000=5000

Net Income

$360,000

Average share outstanding (100,000+5000)

105 000

Basic Earnings Per share

$3.43

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Most popular questions from this chapter

Cordero Corporation has an employee share-purchase plan which permits all full-time employees to purchase 10 ordinary shares on the third anniversary of their employment and an additional 15 shares on each subsequent anniversary date. The purchase price is set at the market price on the date purchased less a 10% discount. How is this discount accounted for by Cordero?

EXCEL (Entries for Conversion, Amortization, and Interest of Bonds) Volker Inc. issued \(2,500,000 of convertible 10-year bonds on July 1, 2017. The bonds provide for 12% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was \)54,000, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Volker Inc.’s \(100 par value common stock for each \)1,000 of bonds. On August 1, 2018, $250,000 of bonds were turned in for conversion into common stock. Interest has been accrued monthly and paid as due. At the time of conversion, any accrued interest on bonds being converted is paid in cash.

Instructions

Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following

dates. (Round to the nearest dollar.)

(a) August 1, 2018. (Assume the book value method is used.)

(b) August 31, 2018.

(c) December 31, 2018, including closing entries for end-of-year.

Refer to the data for Barwood Corporation in BE16-6. Repeat the requirements assuming that instead of options, Barwood granted 2,000 shares of restricted stock.

Explain the treasury-stock method as it applies to options and warrants in computing dilutive earnings per share data.

What is meant by the term antidilution? Give an example.

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