EPS

Question 1

Basic vs diluted EPS

Answer 1

Basic

• looks at EPS on a per-share basis for shares that were outstanding during the year
• historical measurement

Diluted

• looks at EPS on a per-share basis for shares that were outstanding and also for shares that had the potential to be oustanding during the year
• forward looking measurement

Question 2

Basic EPS =

Answer 2

Net earnings (loss) available to common s/h / weighted avg c/s o/s (WASCO)

Question 3

net earnings available to c/s

Answer 3

Net income - any dividends on preferred shares

• cumulative preferred shares: deduct the amount of dividends owed in the year, regardless of whether dividends have been declared
• non-cum pref shares: deduct the amount of dividends declared only

Question 4

WACSO

Answer 4

• Treasury shares, which are issued but not o/s, are NOT included in the calculation

Adj factor

• Stock dividend
• 2:1 stock split -> shares * 2, adj = 2 bef occurs.

Question 5

Diluted EPS

Answer 5

a hypothetical measure of a company’s earnings attributable to each common s/h assuming all dilutive securities have been converted to c/s

= (Net earnings available to c/s + income effect of dilutive PCS)/ (WASCO + share effect of dilutive PCS)

Question 6

Diluted EPS (5 steps)

Answer 6

1. Calculate basic EPS
2. Identify all PCS
3. Calculate incremental EPS for each class of PCS
4. Order the incremental EPS
5. Recompute provisional EPS until diluted EPS is determined

Question 7

Diluted EPS calculation

Answer 7

Question 8

Convertible bonds
Incremental EPS

Answer 8

Income impact = (Bond CV) (Eff int rate) (1-tax rate)

Share impact = # of shares increased if exercised

Question 9

Convertible pref shares

Answer 9

Income impact

Share impact

• Non cum - only considered if declared

Question 10

Stock options/warrants