16. Earnings Per Share

Question 1

How do you calculate basic EPS?

Answer 1

Divide net income minus preferred stock dividends by weighted average common shares outstanding during the year.

Question 2

How do you calculate weighted average common shares outstanding?

Answer 2

New issuances of stock and repurchases or treasury stock are prorated for the period the stock was outstading during the year.

Stock dividends and stock splits are retroactive, meaning the change in shares outstanding is treated as if the shares had always (or never) been outstanding.

Question 3

What makes a security dilutive or anti-dilutive?

Answer 3

A security is dilutive if it has a conversion feature that, if exercised, would reduce EPS for other securities from the same issuer.

A security is anti-dilutive if it has a conversion feature that, if exercised, would increase EPS for other securities from the same issuer.

Question 4

How do you calculate diluted EPS using the if-converted method?

Answer 4

Calculate basic EPS and make the following adjustments:

1. Numerator: increase earnings by the preferred dividends and/or interest expense (net of tax) that would not have been due if the securities had been converted to common stock at the beginning of the year
2. Denominator: increase shares by the additional common shares that would have been outstanding if securities had been converted. Convertible preferred stock and convertible debt is assumed to have been converted at the beginning of the year or time of issuance, whichever is later. No weighting required.