Ch. 24 - Earnings per Share

Question 1

Two types of earnings per share

Answer 1

1. basic EPS

2. Diluted EPS

Question 2

Basic EPS calculation

Answer 2

Net earnings available to common share holders / WACSO

Question 3

Net earnings available to common shareholders =

Answer 3

net income - dividends on preferred shares

Question 4

WACSO - two things to consider

Answer 4

1. Treasury shares (not outstanding) are not included

2. stock splits / dividends are deemed to have been done at the beginning of the period

Question 5

Diluted EPS calculation

Answer 5

(net earnings available to common shareholders + income effect of dilutive PCS) / (WACSO + share effect of dilutive PCS)

Question 6

five step process for diluted EPS

Answer 6

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

Question 7

PCS - Bonds

1. income impact
2. share impact

Answer 7

1. bond carrying value x effective interest rate x (1-tax rate)
2. additional common shares from conversion

Question 8

PCS - convertible preferred shares

1. income impact
2. share oimpact

Answer 8

1. depending on whether dividends are cumulative or not (if cumulative, include, if not cumulative include if dividends have been declared)
2. additional common shares from conversion

Question 9

PCS - Stock Options

1. income impact
2. share impact

Answer 9

1. no income impact

2. # of options x (market price - exercise price) / market price

Question 10

most vs least dilutive (is EPS bigger or smaller)

Answer 10

more dilutive items have a lower EPS, while less dilutive items have a higher EPS

Question 11

Why to order PCS when calculating dilutive EPS

Answer 11

only dilutive PCS are included in calculation