Chrissy Corporation Financial Analysis for 2017
Chrissy Corporation Securities Overview
Chrissy Corporation had the following securities outstanding at its fiscal year end December 31, 20X7:
- 200,000 Options: $11 exercise price; each option allows for the purchase of one share
- Common Shares: no par; authorized 5,000,000 shares; issued and outstanding 600,000 shares
- 7.5% Convertible Bonds: par value $2,500,000
- Preferred Shares: cumulative, convertible, $1.25 dividend per quarter, no par
Other Information for 20X7:
- a) Options were outstanding all year to purchase 200,000 common shares at $11 per share
- b) 20X7 net earnings were $790,000
- c) Interest expense was $216,000 on the 6% bonds
- d) The preferred shares are convertible into common shares at a rate of 9 common shares for 1 preferred share
- e) The 7.5% convertible bonds are convertible at a rate of seven shares for each $100 bond
- f) The tax rate is 35%
- g) Common shares traded for an average of $32 during the year
- h) No dividends were declared in 20X7
- u) No common shares were issued or retired during the year
Required Calculations
1. Calculate basic EPS for the 2017 year. (4 marks)
2. Test each security for dilution and identify each as dilutive or anti-dilutive. If options are dilutive, show the calculation of new shares issued. SHOW ALL CALCULATIONS (9 marks)
3. Prepare a cascade worksheet to show the calculation of diluted EPS, beginning with basic EPS. (5 marks)
1. What is the basic EPS for the year 2017? 2. Are the options dilutive or anti-dilutive? What about the convertible bonds and preferred shares? 3. How is the diluted EPS calculated in a cascade worksheet?
Answers
The basic EPS for Chrissy Corporation for the year 2017 is $1.32 per share. The options are dilutive as the assumed proceeds of $2,200,000 from the exercise of the options at the average market price of $32 per share exceed the cost of repurchasing the common stock. The diluted EPS is the same as the basic EPS, which is $1.32 per share.
Calculations
Basic EPS calculation:
Net earnings = $790,000
Weighted average of common shares outstanding = 600,000
Basic EPS = Net earnings / Weighted average of common shares outstanding
Basic EPS = $790,000 / 600,000 = $1.32
Dilution test:
Exercise price = $11
Average market price per share = $32
Options outstanding = 200,000
Options are anti-dilutive because the exercise price is higher than the average market price per share.
Convertible bonds are anti-dilutive as the number of shares convertible is less than the potential dilutive effect of the bonds.
Preferred shares are anti-dilutive as the number of shares convertible is less than the potential dilutive effect of the preferred shares.
Cascade worksheet for diluted EPS:
Basic EPS = $1.32
Convertible bonds = 35,714 shares
Weighted average of common shares outstanding = 600,000
Potential dilution from convertible securities = 35,714 / (600,000 + 35,714) = 0.0563
Diluted EPS = $1.30