Champion had 2 million shares outstanding on December 31, Year 7, its year-end. On March 31,
Year 8, Champion paid a 10% stock dividend. On June 30, Year 8, Champion sells $10 million of 5% convertible debentures, convertible into common shares at $5 per share. The AA bond rate on the issue date is 10%.
1. Basic earnings per share for Year 8 is computed on the following number of shares:
a. 2,050,000
c. 3,200,000
b. 2,150,000
d. 4,200,000
2. Assume that Champion also has outstanding warrants to purchase 1 million shares at $5 per share. The price of Champion common shares is $8 per share at December 31, Year 8, and the average share price for Year 8 is $4. For the computation of basic earnings per share, how many additional shares must be assumed to be outstanding because of the warrants?
a. Zero
c. 625,000
b. 375,000
d. 1,000,000
3. Given the same facts as in (2), how many additional shares must be assumed to be outstanding because of the warrants when computing diluted earnings per share?
a. Zero
c. 625,000
b. 375,000
d. 1,000,000