Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
P16-5 (Basic EPS: Two-Year Presentation) Hillel Corporation is preparing the comparative financial statements for the annual report to its shareholders for fiscal years ended May 31, 2006, and May 31, 2007
P16-5 (Basic EPS: Two-Year Presentation) Hillel Corporation is preparing the comparative financial
statements for the annual report to its shareholders for fiscal years ended May 31, 2006, and May 31, 2007.
The income from operations for each year was $1,800,000 and $2,500,000, respectively. In both years, the
company incurred a 10% interest expense on $2,400,000 of debt, an obligation that requires interest-only
payments for 5 years. The company experienced a loss of $500,000 from a fire in its Scotsland facility in
February 2007, which was determined to be an extraordinary loss. The company uses a 40% effective tax
rate for income taxes.
The capital structure of Hillel Corporation on June 1, 2005, consisted of 2 million shares of common
stock outstanding and 20,000 shares of $50 par value, 8%, cumulative preferred stock. There were no
preferred dividends in arrears, and the company had not issued any convertible securities, options, or
warrants.
On October 1, 2005, Hillel sold an additional 500,000 shares of the common stock at $20 per share.
Hillel distributed a 20% stock dividend on the common shares outstanding on January 1, 2006. On
December 1, 2006, Hillel was able to sell an additional 800,000 shares of the common stock at $22 per
share. These were the only common stock transactions that occurred during the two fiscal years.
Instructions
(a) Identify whether the capital structure at Hillel Corporation is a simple or complex capital structure,
and explain why.
(b) Determine the weighted-average number of shares that Hillel Corporation would use in calculating
earnings per share for the fiscal year ended
(1) May 31, 2006.
(2) May 31, 2007.
(c) Prepare, in good form, a comparative income statement, beginning with income from operations,
for Hillel Corporation for the fiscal years ended May 31, 2006, and May 31, 2007. This statement
will be included in Hillel’s annual report and should display the appropriate earnings per share
presentations.
Expert Solution
(a) Identify whether the capital structure at Hillel Corporation is a simple or complex capital structure,
and explain why.
Hillel Corporation has a simple capital structure since it does not have any potentially dilutive securities.
(b) Determine the weighted-average number of shares that Hillel Corporation would use in calculating
earnings per share for the fiscal year ended
(1) May 31, 2006.
(2) May 31, 2007.
The weighted average number of shares that Hillel Corporation would use in calculating earnings per share for the fiscal years ended
May 31, 2006, and May 31, 2007, is 2,800,000 and 3,400,000 respectively, calculated as follows:
2006
Dates Shares Fraction Weighted
Event Outstanding Outstanding Restatement of Year Shares
Beginning balance June 1-Oct. 1 2,000,000 1.2 4/12 800,000
New Issue Oct. 1-May 31 2,500,000 1.2 8/12 2,000,000
2,800,000
2007
Dates Shares Fraction Weighted
Event Outstanding Outstanding Restatement of Year Shares
Beginning balance June 1-Dec. 1 3,000,000 6/12 1,500,000
New Issue Dec. 1-May 31 3,800,000 6/12 1,900,000
3,400,000
(c) Prepare, in good form, a comparative income statement, beginning with income from operations,
for Hillel Corporation for the fiscal years ended May 31, 2006, and May 31, 2007. This statement
will be included in Hillel's annual report and should display the appropriate earnings per share
presentations.
HILLEL CORPORATION
Comparative Income Statement
For Fiscal Years Ended May 31, 2006 and 2007
2006 2007
Income from operations $1,800,000 $2,500,000
Interest expense1 240,000 240,000
Income before taxes 1,560,000 2,260,000
Income taxes at 40% 624,000 904,000
Income before extraordinary item 936,000 1,356,000
Extraordinary loss, net of income taxes of $200,000 300,000
Net income $936,000 $1,056,000
Earnings per share:
Income before extraordinary loss 0.31 2 0.38 3
Extraordinary loss 0.09 4
Net income $0.31 0.29 5
1Interest expense = $2,400,000 X .10
= $240,000
2Earnings per share = (Net income - Preferred dividends)
Weighted Average Number of Common Shares
= ($936,000 - $80,000*)
2,800,000
= $.31 per share
*Preferred dividends = (No. of Shares X Par Value X Dividend %)
= (20,000 X $50 X .08)
= $80,000 per year
3Earnings per share = ($1,356,000 - $80,000)
3,400,000
= $.38 per share
4Earnings per share = Extraordinary Item
Weighted Average Common Shares
= $300,000
3,400,000
= $.09 per share
5Earnings per share = Net Income - Preferred Dividends
Weighted Average Common Shares
= $1,056,000 - $80,000
3,400,000
= $0.29
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
