Earnings per share

Bass Ltd, a leading producer of construction, mining and electrical equipment, suffered a significant drop in the demand of the company’s products due to COVID-19 in 2020 that significantly threatens the financial stability of the company. Bass in order to survive in this critical situation decides to restructure its strategy for forthcoming years. Changes in company strategies and accounting policies have a significant impact on reported profit. The basic earnings per share and diluted earnings per share presented in the company’s current year financial statements in accordance with “AASB 133 Earnings per Share” were comparatively higher than that of the last year. In contrast, company share prices have dropped by 20% at the reporting date, according to Yahoo finance.

While most shareholders seem unhappy to own company shares for the meagre dividend attached to them the question of whether Bass Ltd are fully valued at their current share prices continues to linger.

The directors of Bass Ltd are not sure how to calculate and include basic and diluted earnings per share in the company’s financial statements in accordance with AASB 133, and called for a report from the Finance Manager of the company.

On 30 June 2020, Bass Ltd had the following equity:

During the year ended 30 June 2020, the company earned after tax profit of $1 240 000 from ordinary activities.

The additional information is available.

1. On 20 November 2019, the company made a one-for-five bonus issue, and on 30 March 2020, the company made a rights issue of 400 000 ordinary shares.
2. On 20 July 2017, the company issued $ 750 000 of 8% convertible notes. Each $ 100 note was convertible into 50 ordinary shares. There was no conversion during the year ended 30 June 2020.
3. On 28 February 2019, the company issued options to purchase 10 000 shares at $ 3.50 each. No options were exercised during the year ended 30 June 2020.
4. The company income tax rate is $ 0.30 in the dollar and the company’s ordinary shares are trading at $ 5 per share on 30 June 2020.
5. The company paid preference dividends of $ 40 000.

Required

1. Briefly describe the requirements of AASB 133 ‘earnings per share’ for the calculation of earnings per share.                                                                                                                         
2. Distinguish between basic and diluted earnings per share.                                              

Following the requirements of AASB 133:

3. Calculate basic earnings per share.                                                                                           
4. Calculate diluted earnings per share.                                                                                     

Jack has a restaurant in downtown Rochester, New York. He decided to expand his restaurant business to the University of Rochester neighborhood. Jack contacted Cindy, who owns a building on Mt. Hope Ave., Rochester, New York. Mt. Hope Ave. is populated with businesses that service University of Rochester students. Jack offered to buy the building. Cindy had bought the building with her husband Mike thirty years earlier, as tenants by the entirety. Cindy used the building as a health food store. Cindy and Mike do not live together. It is not clear if Cindy and Mike are divorced or if Mike transferred his interest in the building to Cindy. Mike lives in Aruba, where he has an investment consulting business. Cindy was anxious to sell the building quickly because she heard a rumor that a potentially noisy bar (“Nasty’s”) was slated to move in next door. After brief negotiations, Jack and Cindy executed a purchase and sale contract for Jack to purchase the building for $750,000. There were no contingencies in the purchase and sale contract.

Prior to the scheduled date of the closing, Jack learned the following:

(1) There is no access to the rear delivery entrance of the building other than over an alley owned by the neighboring building, which had been used by Cindy for 30 years;

(2) Nasty’s was opening in one month and in its previous location, Nasty’s had been frequently cited for noise ordinance violations;

(3) Cindy removed all the plumbing in the building;

(4) The building is not designated by the City of Rochester for commercial use as a restaurant and violates the deed.

Jack refused to buy the building. Cindy files a lawsuit against Jack. What will Cindy argue? What will Jack argue? How will the court rule on this case? Provide justification for your decision.

Respond to the reading below the course name is money and banking.

Chapter 1, Page 19

2. What effect might a fall in stock prices have on business investments?

Any new stock the company issues at the time of falling stock prices reduces the new revenue the firm can acquire through sales of stock. This in turn might lead to a decrease in the firm’s investments. A falling stock price also reduces a firm’s ability to acquire other firms, as such buyouts often include offers of the acquiring firm’s shares in exchange (at a set ratio) for those of the firm to be acquired.

4. Why are financial markets important to the health of the economy?

Purchases and selling of stocks, bonds, and foreign currencies make financial transactions that fund investments made by firms, governments, banks, and consumers. The activities enabled by these funds make the generation of the goods and services desired by consumers. Their financial instruments also serve as stores of wealth for those seeking to accumulate further wealth and are converted to other forms of wealth (such as money) to enable their purchasing of goods and services.

Chapter 2

7. What is the difference between a mortgage and a mortgage-backed security?

According to our text, a mortgage is a form of debt instrument in which is created “a contractual agreement by the borrower to pay the holder of the instrument fixed dollar amounts at regular intervals (interest and principal payments) until a specified date (the maturity date), when a final payment is made.” The purpose of this borrowing is to allow borrowers to purchase land, housing, or other real structures. On the other hand, mortgage-backed securities are financial instruments created by institutions through the bundling of multiple mortgages into a single instrument, in a manner similar to that of a mutual fund consisting of a collection of shares of stock from a variety of corporations.

10. How does risk sharing benefit both financial intermediaries and private investors?

Risk sharing is a process by which financial intermediaries purchase large amounts of low risk securities in large volumes and at corresponding lower transaction costs/share than a small investor could afford to purchase and sell these to private investors for a profit. This benefits the private investor by transferring to them instruments with low risk at a price lower than the individual investor could obtain on his own. The large amount of funds generated by these sales of low-risk securities enabled the financial intermediaries to purchase smaller values of higher risk instruments than they would otherwise have been able to safely purchase (if some of the high-risk instruments decrease in value/price, they financial intermediary does not become insolvent, as they have not converted all of their profit from selling low-risk instruments into high-risk instruments, it is money they can now afford to lose for the possibility of making rates of return on their higher-risk investments). The financial intermediary is now in possession of higher-risk instruments that they can sell to individual investors able and willing to tolerate greater risk in exchange for the possibility of higher rates of growth (asset transformation from low-risk to high-risk instruments). Financial intermediaries are also capable of repackaging/bundling mixtures of high and low-risk securities from different sectors of the economy so as to create new financial instruments that a spectrum of risk and potential growth rates to appeal to individual investors with a wide variation in appetites for risk (diversifying the investments of individual investors).

Acquisition Case Study

Company A's board of directors has agreed to a $12,7 billion buyout of the company by two private equity firms, sources told the media on Monday. Comapny A has struck an agreement in principle for PE Fund 1 and Fund 2 to buy all 150 million outstanding shares of Company A for $85 a share in an all cash deal, the sources said.

Final details of the transaction are being hammered out, and the deal could be in place by the opening bell of the NYSE today, a source said. "The price was agreed upon last week," a source said. "The details of the transaction are holding this up. This is a very complicated transaction." Sources said issues such as timing of the stock purchase and dates for closing the transaction were some of the points holding up an announcement. The deal would have to be approved by regulators in the 13 states where Company A operates and has distribution centers, including California and New Jersey.

Representatives of Company A and the private equity firms would not confirm the existence of an agreement Monday. Company A spokesman Mr. Smith on Monday said he could not comment on "market speculation." The media reported the offer earlier Sunday. California's regulators are notified ahead of time by licensees of a potential change in ownership. As of Monday afternoon, members of the licensing committee had not received any word about the Comapny A deal being finalized.
At $12.7 billion, the potenitial deal would rank as the sixth-largest private equity buyout ever, media news said, and would be the largest such transaction for a distribution company.

A committee of Company A board members and representatives and the private equity firms negotiated the terms of the agreement over two days last week in New York. The sides met again Sunday in New York and were reportedly continuing to negotiate on Monda. When the MSNBC announced the news of the deal Monday, shares of Company A jumped on the New York Stock Exchange. By the end of trading, Company A stock price gained $2.68, 3.37 percent, to close at $72.18. Almost 15 million Company A shares were traded during the session, more than four times the average daily volume.

Company A runs distribution centers in 13 states under brands such as Axis, Bruno and Colosus. The company owns the other bottling rights and operates centers in Canada and Spain. Company A has development deals in such countries as Columbia and Slovenia and has a deal to buy United Kingdom distribution hubs London Center International.

In 2010, Company A reportedearnings of $430.3 million on revenue of $7.1 billion. It's projected to make $504 million next year. The company has a market capitalization of almost $10.8 billion. The private equity groups bid $76 a share on Oct. 2 for Company A, reportedly kicking up the offer to $78.50 a share about 10 days later. A special board committee, composed of the non-management board members, began considering the offer.

News of an impending deal for Company A was good for shares of another distribution centers. Company X, which had been bidding against the private equity groups for control of Company A, had its stock price climb $3.08, 8.1 percent, on the Nasdaq National Market to close at $31.24. Company X reportedly had submitted a cash and stock bid of $83.50 a share for Company A.

UBS analyst Adam, in a note to investors Monday, said he did not support the regional operator bidding on Company A. Company X has 16 distribution centers in 12 states. "We were not in favor of the company purchasing Company A given the steep price tag and the number of shares that would have to be issued by Company X to consummate the transaction," Adam said. "Through this process, we believe that Company X has obtained a head start on other companies that would be interested in acquiring some of Company A assets, which might be divested following the privatization." Adam would not rule out Company X operation a similarty styled centers. "Company X sent a powerful message to the investment community that it is prepared to become very active in further industry consolidation and is serious in its pursuit of a presence in California and New Jersey." Adam said. "Comapny X has reached its current size through prudent acquisitions, which have delivered value to shareholders."

Company X could be in the market for other similar companies that do not have shares concentrated in a single person or family, analysts said. That ruled out companies such as Company Y and Company Z. "We believe other small-cap companies could now become potential candidateds for acquisition by Company X." Adam said. "These companies include Company E, which we view as a smaller version of Company A and which has very little overlap with Company X."

PE Fund B founding partner Jack was the fomer co-head of corporate finance at now-defunct Total Finance Inc., the top underwriter of high-yield corporate debt before collapsing in 1980. Jack, 55, founded PE Fund B that year and has mede equity investments of more that $16 billion. PE Fund A created the nation's second-biggest buyout fund this year, raising $10 billion. The firm has raised more than $18 billion through six funds in the 12 years since it was founded by Dan, Joel and Bill. It has invested in about 75 companies.

At $85 a share, PE Fund A and PE Fund B would be paying less for Company A earnings than what Company Y's or Company Z's profits are worth on the stock market. Company A is being valued at 21.4 times projected 2011 earnings, based on the average estimate of 18 analysts surveyed by Bloomberg. That compares with a 24.6 ratio for Company Z and 50.7 for Company Y. At last week's stock market price, according to Bloomberg data.

QUESTIONS:
1. Background information of the deal
2. Potential opportunity
3. Potential issue
4. Your reasoning of why X made a bid for A
5. Your reasoning of why UBS is against X' bid of A

Question 1

As of January 2014, 58% of American adults have a Smartphone and on average, spend 34 hours per month using the mobile internet on Smartphone.

A researcher became interested to estimate the unknown average hours students in a given university spend in the mobile internet on Smartphone. The researcher takes a sample of 10 students in the university. The sample data is given below:

Suppose that the population standard deviation of students spending in the mobile internet on Smartphone is 7.89.

The point estimate of population mean μ  is

Group of answer choices

38.6

58

10

35

Question 2

As of January 2014, 58% of American adults have a Smartphone and on average, spend 34 hours per month using the mobile internet on Smartphone.

A researcher became interested to estimate the unknown average hours students in a given university spend in the mobile internet on Smartphone. The researcher takes a sample of 10 students in the university. The sample data is given below:

Suppose that the population standard deviation of students spending in the mobile internet on Smartphone is 7.89.

A 95% CI of the population mean μ  is

Group of answer choices

(34.49, 42.70)

34.51, 44.21

(31.71, 41.49)

(33.71, 43.49)

Question 3

A researcher wishes to find a 95% confidence interval for an unknown population mean μ using a sample of size 30. The population standard deviation is 8.88.

The margin of error for this confidence interval will be

Group of answer choices

3.2

1.6

2.7

0.95

Boyne University offers an extensive continuing education program in many cities throughout the state. For the convenience of its faculty and administrative staff and to save costs, the university operates a motor pool. The motor pool’s monthly planning budget is based on operating 24 vehicles; however, for the month of March the university purchased one additional vehicle. The motor pool furnishes gasoline, oil, and other supplies for its automobiles. A mechanic does routine maintenance and minor repairs. Major repairs are performed at a nearby commercial garage.

The following cost control report shows actual operating costs for March of the current year compared to the planning budget for March.

The planning budget was based on the following assumptions:

1. $0.14 per mile for gasoline.
2. $0.12 per mile for oil, minor repairs, and parts.
3. $36 per automobile per month for outside repairs.
4. $72 per automobile per month for insurance.
5. $8,610 per month for salaries and benefits.
6. $197 per automobile per month for depreciation.

The supervisor of the motor pool is unhappy with the report, claiming it paints an unfair picture of the motor pool’s performance.

Required:

1. Calculate the spending variances for March.

Consider two $60,000 investments – call them Investment A and Investment B. Both investments will earn $5,000 with a probability of 0.5 and $1,000 with a probability of 0.5. Investment A will use 100% equity financing (issuing stocks). Investment B will get $30,000 through issuing stocks and $30,000 through issuing bonds. Investment B must pay 4% interest on the bonds.

a. Calculate the expected returns on equity (returns after interest payments divided by the amount of equity) for Investment A and Investment B. Express the returns as a percentage.

b. If the investments earned the lower amount ($1,000), what is the rate of return on equity for Investment A and Investment B? If the investments earned the higher amount ($5,000), what is the return on equity for Investment A and Investment B?

c. Using your answers from ‘a’ and ‘b’, what is the standard deviation of the rate of return on equity in each case? Which investment has the highest expected returns on equity? Which has the lowest risk? What explains the difference in risk between the two investments?

The table below shows the national income accounts for a hypothetical economy, Metrica.

a. The income-based estimate of Metrica's GDP is $   billion.

b. The expenditure-based estimate of Metrica's GDP is $   billion.

c. The value of the statistical discrepancy which is added to the lower estimate and subtracted from the higher estimate to find a single GDP value is $   billion.

d. Metrica's GDP is $   billion.

e. Metrica's capital stock   (Click to select)   contracted   expanded  by $   billion.

f. Metrica's GNI is $   billion. This means that income earned by the residents of other countries for their involvement in production in Metrica is   (Click to select)   less   greater  than income earned by residents of Metrica for their involvement in production in the rest of the world.

1. A monopolist serves market A with an inverse demand curve of P = 12 - Q. Another monopolist serves market B with an inverse demand curve of P = 22 - 2Q. Suppose that both monopolists have a constant marginal cost of $2. What is the producer surplus earned by the monopolist serving market A?

2. A monopolist serves market A with an inverse demand curve of P = 12 - Q. Another monopolist serves market B with an inverse demand curve of P = 22 - 2Q. Suppose that both monopolists have a constant marginal cost of $2. What is the producer surplus earned by the monopolist serving market B?

3, A monopolist serves market A with an inverse demand curve of P = 12 - Q. Another monopolist serves market B with an inverse demand curve of P = 22 - 2Q. Suppose that both monopolists have a constant marginal cost of $2. Using your answers from the previous two questions, which producer surplus is higher (in market A or market B) and why?

Concrete Consulting Co. has the following accounts in its ledger: Cash; Accounts Receivable; Supplies; Office Equipment; Accounts Payable; Jason Payne, Capital; Jason Payne, Drawing; Fees Earned; Rent Expense; Advertising Expense; Utilities Expense; Miscellaneous Expense.

Journalize the above selected transactions for October 2019 in a two-column journal. Refer to the Chart of Accounts for exact wording of account titles.