Question

Viceroy Ltd has a December 31 year-end. Its ledger account for Common Shares (Class A voting) showed the following information (dollars amounts are in thousands):

Opening Balance Jan1 = 400,000 shares
Shares issued June 30 = 200,000
Shares issued September 30 = 33,000
Net Income for the Year =$2,000,000
Preferred Shares (Class B Non Voting Cumulative) = 50,000 shares ($600)
Preferred Share Dividend entitlement for the year $100,000

Hint: check EPS formula in the chapter of Financial Statement Analysis

Required 1: What is the Basic Earnings Per Share that Viceroy will report this year? Hint: when number of shares change during the term, a simple average does not apply, instead use the weighted average number of common shares. $


Required 2: The weighted average number of common shares for the year is:


Required 3: The total earnings considered in the EPS formula for the year is: $

Answer 1

The Basic EPS for Viceroy Ltd is calculated by first determining the weighted average number of common shares, which is 483,250, and then subtracting the preferred dividends from the net income, resulting in total earnings of $1,900,000 for common shareholders. The EPS is $3.93 per share.

Step-by-step explanation:

To calculate the Basic Earnings Per Share (EPS) for Viceroy Ltd, we need to determine the weighted average number of common shares and subtract the preferred share dividends from net income.

Required 1: Basic Earnings Per Share

The weighted average number of common shares is calculated considering the timing of new share issuances. For this company, shares have been issued at different times throughout the year, which means a different PDV calculation must be conducted for each issuance:

• From Jan 1 to June 30: 400,000 shares
• From June 30 to Sep 30: 600,000 shares (400,000 + 200,000 new shares)
• From Sep 30 to Dec 31: 633,000 shares (600,000 + 33,000 new shares)

Weighing these based on the period they were outstanding, we get:

• 400,000 shares for 6 months
• 200,000 additional shares for 6 months (issued June 30)
• 33,000 additional shares for 3 months (issued September 30)

The weighted average is therefore calculated as:

((400,000 * 6) + (200,000 * 6) + (33,000 * 3)) / 12 = 483,250 shares

Required 2: Weighted Average Number of Common Shares

The weighted average number of common shares for the year is 483,250.

Required 3: Total Earnings for EPS Formula

The total earnings considered in the EPS formula for the year is the net income minus preferred share dividends: $2,000,000 - $100,000 = $1,900,000.

Finally, to calculate the Basic EPS, divide the total earnings applicable to common shares by the weighted average number of shares:

$1,900,000 / 483,250 = $3.93 per share

Hence, the Basic EPS that Viceroy will report this year is $3.93.