17-5

Question 1

Basic EPS

Answer 1

Don’t forget to subtract DIVIDENDS ON PREFERRED SHARES (and use this net income for the dilution calculation as well)

Question 2

In the money

Answer 2

You calculate the dilution ONLY for options or warrants that are in the money!

Question 3

Options

Answer 3

Almost always they will be the most dilutive (if they are in the money!) as the only add extra shares, nothing on the numerator.

BONDS - adds interest expense back

PREFERRED SHARES - adds on numerator and denominator

Question 4

When deciding the most dilutive to least dilutive don’t forget…

Answer 4

to always calculate the effect on EPS individually, before you put it on the schedule

Question 5

If they give you discontinued operations

Answer 5

you have to calculate EPS three times for each (basic and diluted)

Basic EPS

Income before disc ops :

Disc ops loss: ( )

Net Income

The number of shares stays the same.

Diluted EPS

Income before disc ops : (the most dilutive)

Disc ops loss: ( )

Net Income

The number of shares stays the same (the most dilutive result)

Question 6

Partial Income Statement

Answer 6

Income from continuing operations 950,000

Loss from discontinued operations (150,000)

(net of tax recovery)

Net Income 800,000

Basic earnings per share:

Income form cont ops …..2.61

Disc ops loss (0.43)

Net Income 2.18

Diluted earnings per share

Income form cont ops 2.57

Disc ops loss (0.38)

Net Income 2.19