EPS (Final)

= (Consolidated Net Income - Preferred Dividends) / Weighted Average Number of Common Shares Outstanding

Basic EPS =

dilutive securities

Companies with complex capital structures issue potentially these including convertible debt, convertible preferred stock, employee options, and stock warrants can increase the number of common shares O/S when exercised or converted into common shares, thus reducing or diluting EPS

= [Net Income of the Parent - Preferred Dividends + Adjustment for Parent Securities + (Shares Held by Parent x Subsidiary Diluted EPS)] / (Weighted Average Number of Common Shares Outstanding + Additional Shares Outstanding from Dilution)

Diluted EPS =

Diluted EPS (denominator)

Firms increase by the number of shares assumed to be issued upon conversion, weighting the additional shares from the beginning of the year or from the date of issue, if the convertible debt was issued during the year

Earnings per Share (EPS)

The amount of earnings assigned to each outstanding share of the company's common stock Must report for continuing operations, discontinued operations, and net income in a supplemental section of the I/S Must report on both a basic and diluted basis

stock split

When a company has a _______ ________, they need to divide their net income available to shareholders by a greater number of shares O/S after the split

In-the-money

__________________________________ securities result in incremental shares

Out-of-the-money

__________________________________ securities result in negative incremental shares and are antidilutive

If-Converted Assumption

a company assumes that both hypothetical and actual conversions of dilutive securities occur does not usually impact the EPS numerator because there is typically no impact on net income when the options or warrants are exercised

Convertible Bonds - Beneficial Conversion Options

an option to convert the debt to equity that is "in the money" (market price of stock exceeds the exercise price) GAAP requires companies to separate the debt and equity values of the convertible bond. at date of issuance, option is measured at its intrinsic value (market price less the exercise price)

Weighted Average Shares

based on the amount of time that shares are O/S impacted by stock splits ad stock dividends

Detachable warrants

can be removed by the holder and sold separately on the secondary market

Non-detachable warrants

cannot be removed

Back-door equity financing

companies issue convertible bonds to raise money when equity prices are temporarily depressed By raising capital with convertible bonds, the company issues fewer shares of stock and is less likely to dilute its share price and EPS

Convertible Bonds

financial instruments (i.e., a hybrid security) that enable the bondholder to convert the bonds into a specified number of shares of common or preferred stock attractive to investors treated as debt

Stock warrants

long-term options to acquire a stated number of shares of common stock for a stated price May make a bond with a low stated rate of interest more attractive to investors can be either detachable or non-detachable

Basic Earnings per Share (Numerator)

net income available to common shareholders Net income less preferred dividends If the company has a loss, loss per share will be increased by the amount of preferred dividends

Antidilutive Convertible Securities

occurs if EPS increases or loss per share decreases when assuming the conversion of securities or exercising options and warrants exclude the effects in the EPS computation the incremental income per share effect is higher than basic EPS

Net income

preferred dividend requirements + preferred dividends avoided on convertible preferred stock tax effects are not applicable

Convertible Preferred Stock

requires adjustments to both the numerator and the denominator of EPS from applying the if-converted assumption

Diluted EPS (numerator)

the if-converted assumption places the conversion of all convertible debt into C/S at the earliest possible point during the year Net income and Cumulative preferred dividends

1. The increase in common shares O/S due to the assumed option/warrant exercise of in-the-money instruments 2. The cash proceeds the company receives from the assumed exercise of the options or warrants

two key factors to consider for the adjustment to the denominator:

weighted-average computation

uses the number of shares O/S at different shares related events during the year and weights the shares by the percentage of the total year the shares are outstanding

1. It creates a denominator that is consistent with the net income flow 2. It matches the number of shares with the income generated from the economic resources provided by the shares issued

weighted average has two advantages:

Basic Earnings per Share (Denominator)

weighted average number of shares outstanding Include only outstanding shares Includes all classes of common stock