Reference no: EM132669151
Taj's Baby Wear Corp. (TBW) reports its financial results in accordance with IFRS. Its year end is December 31. TBW's share transactions in 20X1 follow:
Date Nature of transaction Number Outstanding common shares
Jan. 1, 20X1 Common shares outstanding 500,000 500,000
Feb. 1, 20X1 Issuance (sale) of common shares 100,000 600,000
Mar. 1, 20X1 5% common stock dividend 30,000 630,000
June 1, 20X1 Repurchase and retirement of common shares 150,000 480,000
Oct. 1, 20X1 Three-for-one common share stock split 960,000 1,440,000
Dec. 1, 20X1 Repurchase and retirement of common shares 440,000 1,000,000
Details of TBW's preferred shares and potential common shares follow:
- Series 1, cumulative preference shares: 100,000 preference shares each entitled to annual dividends of $1.00 per share. Dividends were neither declared nor paid in 20X1 or 20X2.
- Series 2, non-cumulative preference shares: 200,000 preference shares each entitled to annual dividends of $1.25 per share. Dividends were neither declared nor paid in 20X1 or 20X2.
- Series 3 cumulative, convertible preference shares: $400,000 convertible preference shares each entitled to annual dividends of $1.60 per share. Each $25 preference share can be converted into one common share at the option of the holder at any time after January 1, 20X5. Dividends were neither declared nor paid in 20X2.
- Warrants: 20,000 warrants are outstanding; each warrant enables the holder to purchase one common share for $16 any time between January 1, 20X3, and December 31, 20X6.
- Employee stock options: 50,000 stock options are outstanding; each stock option enables the holder to purchase one common share for $15 on or after January 1, 20X1. The options expire on December 31, 20X8.
- $400,000, 5.0%, five-year, semi-annual bonds issued January 1, 20X0: At the option of the holder, each $1,000 bond can be converted into 17 common shares until December 31, 20X3, and 10 common shares between January 1, 20X4, and December 31, 20X4. The market rate of interest at time of issuance equalled the coupon rate of interest (the bonds are reported at par on the statement of financial position).
- $500,000, 4.5%, 10-year, semi-annual bonds issued June 30, 20X0: At the option of the holder, each $1,000 bond can be converted into 12 common shares at any time before June 30, 20X5. The bonds were issued at par. The market rate of interest at time of issuance equalled the coupon rate of interest (the bonds are reported at par on the statement of financial position).
There were no changes to TBW's share capital in 20X2. No dividends were declared. Select financial data for the company's year ended December 31, 20X2, follows:
Net income $3,000,000
Comprehensive income $3,500,000
20X2 average market price of common shares $20
December 31, 20X2, market price of common shares $14
Income tax rate for the 20X2 fiscal year 25%
TBW did not issue or redeem any equity or convertible debt instruments in 20X2.
The exercise prices and number of shares under the stock option plans as well as the conversion factors for the convertible bonds and preference shares have all been adjusted for the stock split and the stock dividend. Required:
Problem a) Calculate TBW's weighted average number of common shares outstanding (WASO) for its year ended December 31, 20X1. Show all supporting calculations in your answer. For the purposes of parts b), c), and d) assume that the weighted average number of common shares is 1,000,000.
Problem b) Calculate TBW's basic EPS for its year ended December 31, 20X2. Show all supporting calculations in your answer.
Problem c) Calculate the income effect, the share effect and the incremental EPS, and indicate the rank ordering of each dilutive potential common share (PCS).
Problem d) Calculate TBW's diluted EPS for its year ended December 31, 20X2. Ensure that you clearly show which of the PCSs have been included in the determination of diluted EPS.