Question

Calculate the impact to RRM’s 2016 EPS from the activities described in the document.

Below we identify several activities in 2016 for Roger Ranch Mobile, a computer manufacturer and software developer

$200 million of accrued wages for bonuses to software engineers that will not be paid out until the first quarter next year

$7 million in stock based compensation expense for supervisors and employees working at the manufacturing facility where the computer hardware is assembled

$12 million in stock based compensation for software engineers

$9 million in stock based compensation for management

1 million computers sold to and delivered customers at $500 each. Upon sale, RRM has no further obligation to the customer.

$120 million in gift card sales, $10 million of which were already redeemed by the end of 2016.

$15 million cash payment for next year’s first quarter lease payment for RRM’s corporate headquarters

$4 million, paid in cash at the beginning of the year to purchase a customer list to be used for marketing the company’s products. The customer list is expected to provide marketing benefits for the next 4 years

inventory of $100 million at beginning of 2016, $20 million at end of 2016

Purchased $80 million in inventory from suppliers in 2016. RRM still owed $50 million to those suppliers at year end.

$4 million in interest income from an investment in marketable securities.

$5 million in preferred dividends

Tax rate is 40%

Shares at the beginning of the year were 100m. The company repurchased 5m shares at $5 per share in the middle of 2016.

$0.70 per share

$0.72 per share

$0.74 per share

$2.63 per share

$2.69 per share

Answer 1

Revenues:	($ in millions)
Regular (1 million x $500)	$500.00
Gift card sales	$10.00
Total sales		$510.00
Cost of goods sold:
Purchases	$80.00
Change in inventory (100-20)	$80.00
Less: Cost of goods sold		$160.00
Gross margin		$350.00
Expenses:
Accrued wages	$200.00
Stock based compensation expense (7+12+9)	$28.00
Less: Total expenses		$228.00
Earning before interest, tax, depreciation and amortization		$122.00
Add: Interest Income		$4.00
EBT		$126.00
Less: Tax @40%		$50.40
EAT		$75.60
Less: Prefrence Dividend		$5.00
Earning Available for Shareholder		$70.60
Weighted Average No. of share ( 100*6+95*6)/12		97.5
EPS ( EAE/Weighted Average No. of Share		$0.72
Hence Correct Answer is $0.72