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Multiple Choice Quiz
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Enter the letter corresponding to the response that best completes each of the following statements or questions.

1
On January 1, 2006, Olympic Insurance Company granted 30,000 stock options to certain executives. The options are exercisable no sooner than December 31, 2008, and expire on January 1, 2011. Each option can be exercised to acquire one share of $1 par common stock for $12. An option-pricing model estimates the fair value of the options to be $5 on the date of grant. The market price of Olympic's stock was as follows:

January 1, 2006 $14
December 31, 2006 15

What amount should Olympic recognize as compensation expense for 2006?

A)$10,000
B)$20,000
C)$30,000
D)$50,000
2
On January 1, 2006, Jackson Corporation granted its CEO, 40,000 stock appreciation rights, which are exercisable no sooner than December 31, 2009, and expire on January 1, 2012. On exercise, the CEO will receive cash for the excess of the stock's market price on the exercise date over the market price on the grant date. The fair value of Jackson's SARs was $9 on January 2, 2006, and $10 on December 31, 2006. As a result of the stock appreciation rights, Jackson Corporation should recognize compensation expense for 2006 of
A)$0
B)$100,000
C)$133,000
D)$400,000
3
On January 2, 2006, Wilson, Inc. granted Brice Wilson, its president, 15,000 stock appreciation rights that are exercisable no sooner than December 31, 2008, and expire on January 1, 2008. On exercise, Wilson will receive cash for the excess of the stock's market price on the exercise date over the market price on the grant date. The fair value of Wilson's SARs was $9 on January 2, 2006, and $10 on December 31, 2006. As a result of the stock appreciation rights, Wilson Inc. should recognize compensation expense for 2006 of
A)$0
B)30,000
C)50,000
D)$150,000
4
On January 1, 2006, Unified Systems granted its division managers 100,000 stock appreciation rights. The SARs are exercisable no sooner than December 31, 2009, and expire on January 1, 2013. Upon exercise, the division managers can elect to receive cash or common stock equal to the excess of the stock's market price on the exercise date over the market price on the grant date. The fair values of Unified's SARs were as follows:

January 1, 2006$5
December 31, 2006 4
December 31, 20076

As a result of the stock appreciation rights, Unified should recognize compensation expense for 2007 of:

A)$0
B)$100,000
C)$150,000
D)$200,000
5
On January 1, 2006, Baddour Nursery Products granted 400,000 stock appreciation rights to certain executives. The SARs are exercisable no sooner than December 31, 2008, and expire on January 1, 2011. Upon exercise, the executives will receive cash equal to the excess of the stock's market price on the exercise date over the market price on the grant date. The fair values of Unified's SARs were as follows:

January 1, 2006$2
December 31, 20061
December 31, 20073

As a result of the stock appreciation rights, what liability should Baddour recognize in its 2007 balance sheet?

A)$0
B)$300,000
C)$400,000
D)$800,000
6
Which of the following statements is untrue regarding earnings per share?
A)A company has a simple capital structure if it has no outstanding securities that could potentially dilute earnings per share.
B)When shares are retired, they are time-weighted for the fraction of the period they were not outstanding, prior to being subtracted from the number of shares outstanding during the reporting period.
C)Dividends paid on nonconvertible preferred stock outstanding should be subtracted from reported net income.
D)Any new shares issued during the period in a stock dividend or stock split are time-weighted by the fraction of the period they were outstanding and then added to the number of shares outstanding for the period.
7
At December 31, 2006 and 2007, Frist Company had outstanding 50 million common shares and 4 million shares of 10%, $10 par cumulative preferred stock. Net income for 2007 was $20 million. No dividends were declared in 2006 or 2007. EPS for 2007 was:
A)$.32.
B)$.37.
C)$.40.
D)$.48.
8
At December 31, 2006, the balance sheet of Goode Corporation included 80 million common shares. On October 1, 2007, Goode retired 4 million shares as part of a share repurchase program. Net income for the year ended December 31, 2007, was $400 million. Goode's 2007 EPS should be:
A)$4.94.
B)$5.00.
C)$5.06.
D)$5.26.
9
At December 31, 2006, the balance sheet of Darwin Corporation included 8 million common shares and 4 million nonconvertible preferred shares. On July 1, 2007, Darwin issued a 5 for 4 stock split on its common shares and paid $10 million cash dividends on the preferred stock. Net income for the year ended December 31, 2007, was $40 million. Darwin's 2007 EPS should be:
A)$3.00.
B)$4.00.
C)$5.00.
D)$5.55.
10
When calculating basic earnings per share, net income is reduced by dividends on nonconvertible cumulative preferred stock:
A)Whether declared or not.
B)Only if declared.
C)Whether dilutive or not.
D)Under no circumstances.
11
When calculating the weighted average number of shares outstanding, the number of shares are not time-weighted by the fraction of the reporting period they are (are not) outstanding for:
A)Common shares retired.
B)Common shares issued during the period as a stock dividend.
C)Shares obtainable in executive stock options granted in mid-year.
D)New common shares sold during the period.
12
A business is deemed to have a complex capital structure when it has outstanding:
A)Three types of securities or more besides common stock.
B)Executive stock options.
C)Bonds payable.
D)Cumulative preferred stock.
13
To incorporate the effect of outstanding stock options in the calculation of diluted EPS:
A)Would be inappropriate because options are considered only when calculating basic EPS.
B)We would never increase or decrease the numerator of the EPS fraction.
C)We assume common shares are issued at the average market price and repurchased at the exercise price.
D)We assume the options were exercised at mid-year.
14
When calculating diluted EPS, which of the following, if dilutive, would cause the weighted average number of shares to increase?
A)Dividends on preferred stock: Yes; Stock options: No
B)Dividends on preferred stock: Yes; Stock options: Yes
C)Dividends on preferred stock: No; Stock options: Yes
D)Dividends on preferred stock: No; Stock options: No
15
When calculating earnings per share, the effect of after-tax interest expense paid on convertible bonds that are dilutive is to:
A)Increase net income for diluted earnings per share and not for basic earnings per share.
B)Decrease net income for basic earnings per share and not for diluted earnings per share.
C)Increase net income for both basic earnings per share and diluted earnings per share.
D)Decrease net income for both basic earnings per share and diluted earnings per share.
16
Common stock options that are antidilutive generally affect the calculation of:
A)Basic EPS: Yes; Diluted EPS: Yes
B)Basic EPS: Yes; Diluted EPS: No
C)Basic EPS: No; Diluted EPS: No
D)Basic EPS: No; Diluted EPS: Yes
17
Convertible bonds that are dilutive generally affect the calculation of:
A)Basic EPS: Yes; Diluted EPS: Yes
B)Basic EPS: Yes; Diluted EPS: No
C)Basic EPS: No; Diluted EPS: No
D)Basic EPS: No; Diluted EPS: Yes
18
Executive stock options are outstanding all year that permit executives to buy 12 million common shares at $50. The average market price of the common stock was $60. When calculating diluted earnings per share, the assumed exercise of these options will increase the weighted average number of shares outstanding by:
A)zero shares.
B)2 million shares.
C)8 million shares.
D)10 million shares.
19
Executive stock options are outstanding all year that permit executives to buy 12 million common shares at $60. The average market price of the common stock was $50. When calculating diluted earnings per share, the assumed exercise of these options will increase the weighted average number of shares outstanding by:
A)zero shares.
B)2 million shares.
C)8 million shares.
D)10 million shares.
20
Which of the following statements is true regarding diluted earnings per share?
A)It is assumed that stock options are exercised at the beginning of the period (or at the time the options are issued, if later) and the cash proceeds received are used to buy back (as treasury stock) as many of those shares as can be acquired at the closing market price for the period.
B)To incorporate convertible bonds into the calculation, the denominator of the EPS fraction is decreased by the additional common shares assumed.
C)To incorporate convertible securities into the calculation, the numerator is decreased by the interest (after-tax) that would have been avoided in the event of conversion.
D)Contingently issuable shares areconsidered outstanding in the computation of diluted EPS when any conditions for issuance are currently being met.
21
Which of the following is not disclosed regarding earnings per share?
A)Basic EPS for income from continuing operations.
B)Diluted EPS for net income.
C)Cash paid per share.
D)Reconciliation of the numerator and denominator used in the computations.





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