Page 1 Proj06_VLT_EPS_Research_S11 (wip).docx Created by T. Gordon 3/10/11 2:22 PM ACCT 414 - SPRING 2011 RESEARCH PROJECT - EARNINGS PER SHARE For each situation described below, compute earnings per share. You will need to research the answers in the FASB codification (ASC) – particularly for #4 and #6. Attach well-organized, neat schedules of your computations including assumptions made and references to the pronouncements to justify your position. If you use Excel, be sure the assumptions used are obvious and not just buried in formulas. VLT Corporation net income for 2010 $217,194,356 Tax rate 40% The average stock price for 2010 was $42.02. You have daily stock price information available so that you can determine average prices during any portion of the year. Capital Structure for VLT Corporation Common stock $1 par value. At 1/1/10, there were 15,000,000 shares issued & 1,600,000 treasury shares making the shares outstanding equal to 13,400,000 shares VLT issued 2,000,000 additional shares on 3/1/10 There was a 10% stock dividend on 8/1/10 Treasury stock, balance at 1/1/10 (cost $23.96 each) 1,600,000 shares 600,000 shares sold on 1/31/10 for $34.88 each and 1,000,000 additional shares acquired 11/1/10 for $57.26 each Preferred stock $100 par value, shares outstanding at 1/1/10 500,000 shares The stock is cumulative and convertible into 40 shares of common stock (before any 2010 stock splits or stock dividends). An additional 500,000 shares issued were issued at par on 6/1/10. The stock pays a $8.00 annual dividend paid on July 15 and January 15. Total dividends declared on preferred stock during 2010 were $6,000,000. VLT Corporation uses the effective interest method to amortize bond premiums and discounts (unless otherwise stated). The company has a complex capital structure. Therefore, both basic and diluted earnings per share must be computed (they could be the same number). Be sure your solution has CLEAR LABELS for basic and diluted for each problem. 1. Determine the weighted average shares of common stock outstanding during 2010. Compute earnings per share assuming that the preferred stock is the only potentially dilutive security. 2. Same as #1 except VLT Corporation has convertible bonds oustanding with a face value of $40,000,000. The bonds pay 8% interest semiannually on January 1 and July 1. The bonds were sold to yield 7%. The carrying value of the bonds on 12/31/09 was $44,499,090. Each $1,000 bond can be converted into 200 shares of common stock (before any 2010 stock dividends or stock splits). Compute basic and diluted earnings per share assuming that there are no potentially dilutive securities other than the convertible preferred stock and the convertible bonds.Page 2 Proj06_VLT_EPS_Research_S11 (wip).docx Created by T. Gordon 3/10/11 2:22 PM 3. Same as #2 except that VLT Corporation had 5,500,000 options outstanding at the beginning of the year. The option price (strike price) was $20.00 to buy one share of common stock. On July 31, 2010, all of the options were exercised when the market price reached $50.00 per share. The average price for VLT common shares for the first 7 months of the year was $39.37. Hint: you will need to recompute the weighted average shares of common stock because the options were exercised causing additional shares of common stock to be issued. (All amounts have been adjusted for the stock dividend.) Note that you will need to recompute the weighted average shares of common stock because the options were exercised and additional shares of common stock were issued. 4. Same as #2 except that VLT Corporation has outstanding contracts which require that it repurchase its own stock (written put options) at $60 per share. These put options were issued in conjunction with a business acquisition in 2009. In total, 500,000 shares of VLT common stock would have to be purchased should the put options be exercised by the holders. The options can be exercised between July 1, 2009 and July 1, 2012. (Hint: you could search for the reverse treasury stock method.) 5. Same as #3 except that VLT has two additional convertible bond issues, another type of cumulative preferred stock, and additional options outstanding for all or part of the year. a. Convertible bonds oustanding with a face value of $90,000,000. The bonds pay 10% interest semiannually on January 1 and July 1 and were originally sold to yield 9.25%. The carrying value of the bonds on 12/31/09 was $94,063,430. Each $1,000 bond can be converted into 440 shares of common stock after the stock dividend. No bonds were converted during the year. b. On April 1, 2010, VLT issued $600,000,000 in 20-year convertible bonds for $598,700,000. Since the discount was small, the company is using the straight-line method to amortized the discount. Each $5,000 semi-annual bond pays a coupon rate of 8% interest and can be converted into 110 shares after the stock dividend. No bonds were converted during the year. c. 2,000,000 shares cumulative preferred stock ($100 par) which pay a 9% dividend. Each share of preferred can be converted into 33 shares of common stock after the stock dividend. d. 20,000,000 options outstanding all year. After the stock dividend, the adjusted option price was $36.04 and each option entitled the holder to purchase one share of common stock. EXTRA CREDIT 6. Same as #2 except that the convertible bonds participate in dividends paid to common shareholders. After the common stock has been paid a dividend of $.50 per share, the bondholders then participate in any additional dividends on a 40:60 per share ratio with the common shareholders. The bondholders receive common stock dividends based on the number of shares of common stock that the bonds are convertible into. The bondholders do not have any voting rights prior to actual conversion of their bonds into shares of common stock. For 2010, the common shareholders were paid $1.10 per share to holders of record on Sept. 1, 2010. Compute basic EPS under the two-class method. (Hint: There is a specific example in the ASC similar to to this problem.)Page 3 Proj06_VLT_EPS_Research_S11 (wip).docx Created by T. Gordon 3/10/11 2:22 PM Note: Numbers 1 to 3 are worth 15 points each. Number 4 is worth 20 points. Number 5 is worth 35 points. Number 6 is worth up to 10 points extra credit. You may work in small groups (no more than 3 students). This