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Complex Capital Structure

Big Horn construction company has gradually grown in size since its inception in 1919. The third generation of Jensens who now manage the enterprise are considering selling a large block of stock to raise capital for new equipment purchases and to help finance several ig projects. The Jensens are concerned about how the EPS information should be presented on the income statement and have many questions concerning the nature of EPS.

1) Discuss EPS presentation that would be required if Big Horn construction has
(a) a simple capital structure or (b) a complex capital structure. WHat factors determine whether a capital structure is simple or complex?

2) Assume that big horn construction company has a complex capital structure . Discuss the effect , if any of each of the following transactions on the computation of EPS
a. the firm acquires some of its outstanding stock to hold as treasury stock
b. the firm pays a dividend of $0.50 per common stock share
c. the firm declares a dividend of $0.75 per share on cumulative preferred stock
d. a 3 for 1 common stock split occurs during the year

Solution Preview

1. A company has a simple capital structure when it has only common stock, preferrred stock or nonconvertible preferred stock and no other securities that can be converted into common stock. A complex capital structure exists when there are additional securities that can be converted to common stock such as convertible securities, warrants or options.
(a) In a simple capital structure only the basic EPS needs to be reported. The Basic EPS ...

Solution Summary

The solution explains a complex capital structure and its impact on EPS