Question

The Arndt Company repurchased 50,000 shares of its own common stock on the stock exchange during 2019. At the end of 2018, Arndt had 750,000 shares of its common stock outstanding, During 2019, no preferred dividends were paid but $350,000 of dividends were paid on common stock. Net income for 2019 was $3,300,000. Which of the following is NOT true for 2019 based only on the above information? a. Earnings per share would be calculated using 350,000/750,000. b. Stockholders equity would decrease because of the dividends paid. c. Earnings per share for 2019 is higher because of the stock repurchase than if the purchase had not been made. d. The purchase of treasury stock will reduce cash during 2019.

Answer 1

The answer is a. Earnings per share would be calculated using 350,000/750,000.

Step-by-step explanation:

Please find the below for explanations:

The EPS is calculated as Net income for 2019 / Average stock outstanding or 3,300,000/ [( 750,000 + 700,000) /2] = 3,300,000/725,000 = $4.55. Thus, (a) is not a correct statement.

b is correct because once dividend paid out, retained earnings account will decrease causing Stockholder equity to decrease.

c is correct because stock repurchase will lower the Average Stock Outstanding which will rise the EPS in comparison to the scenario where stock repurchase is not made.

d is correct because repurchase are usually made by cash.