Question

1)JSW Inc. reported 2015 basic EPS of $7.50 compared to 2014 basic EPS of $10.00. Which of the following activities could most plausibly and directly contribute to the changes observed in JSW’s basic EPS from 2014 to 2015?

A Smaller issuance of preferred dividends in 2015 than in 2014.

B Acquisition of a trademark in 2015.

C Larger declines in the fair value of available for sale securities in 2015 than in 2014.

D Large numbers of employee options were exercised at the beginning of 2015.

E Lower use of net operating losses (NOLs) to reduce tax liability in 2015 than in 2014.

Answer 1

• The correct answer is Option ‘D’: Large numbers of employee options were exercised at the beginning of 2015.
• Basic Earning per share is calculated by dividing Net Income available to common stockholders by the total weighted number of outstanding common stock shares.
• Basic EPS of 2015 is $ 7.5 while in 2014, it was reported to be $ 10. This means that Basic EPS has FALLEN.
• The two basic reasons due to which the Basic EPS has decreased to $7.5 can be:

1.Fall in Net Income available to Common Stockholders [fall in numerator]
2.Increase in number of weighted average number of common stock outstanding [increase in denominator]

• When large number of Employee Options were exercised at the beginning of 2015 (Option – D), the direct effect will be that the total number of weighted average common stock shares outstanding will INCREASE. This will result in higher denominator value and HENCE, fall in basic EPS.