Chapter 17 Midterm 2 Flashcards
Why is Earnings Per Share (EPS) important for shareholders?
EPS shows how much income is earned for each common share, helping assess company performance and the potential for dividends.
What does EPS help investors understand?
EPS helps investors assess the profitability of a company and predict the value of shares.
What is the objective of calculating EPS?
To show how much profit each share generates for common shareholders and to assess the company’s financial health.
What is Basic EPS?
Basic EPS calculates the profit allocated to each outstanding common share.
How is Basic EPS calculated?
Basic EPS = Net Income - Preferred Dividends / Weighted Average Shares Outstanding (WACS).
What is Diluted EPS?
Diluted EPS considers potential common shares from convertible securities, stock options, and other instruments that could reduce EPS.
How is Diluted EPS calculated?
:Diluted EPS = (Net Income + Adjustments for Dilution) / (WACS + Diluted Shares).
What is the difference between Basic EPS and Diluted EPS?
Basic EPS uses actual shares outstanding, while diluted EPS includes potential shares from convertible instruments.
What is a complex capital structure?
A complex capital structure involves common shares and potential dilutive securities (e.g., convertible debt, options).
What is a simple capital structure?
A simple capital structure only includes common shares and non-convertible securities.
When is Basic EPS calculated?
Basic EPS is calculated when a company has a simple capital structure.
Why do companies with a complex capital structure calculate both Basic and Diluted EPS?
To show the effect of potential dilutive securities on earnings per share.
What does WACS stand for?
WACS stands for Weighted Average Shares Outstanding, the number of shares in circulation, weighted by the time they were outstanding.
How do stock splits and stock dividends affect EPS calculations?
The weighted average number of shares must be adjusted to reflect the increase in shares from stock splits or dividends.
What is the If-Converted Method used for?
The If-Converted Method is used to calculate the dilutive effect of convertible securities (like bonds or preferred shares).
What happens to EPS when convertible securities are converted?
When convertible securities are converted, they increase the number of shares outstanding and impact Diluted EPS.
What is the effect of antidilutive securities?
Antidilutive securities would increase EPS if converted or exercised, so they are excluded from the Diluted EPS calculation.
What is the Treasury Stock Method?
The Treasury Stock Method is used to calculate the impact of written call options on Diluted EPS.
How does the Treasury Stock Method work?
It assumes options are exercised at the beginning of the year and the company uses the money to buy back shares at the average market price.
What happens if the exercise price of put options is higher than the market price?
The option is considered dilutive and is included in the Diluted EPS calculation.
What is the Reverse Treasury Stock Method?
This method calculates the effect of written put options on EPS, assuming options are exercised at the beginning of the year.
Q: How are contingently issuable shares treated in EPS calculations?
Contingently issuable shares are included in WACS once the conditions are met, as long as they would be dilutive
What is the Price-Earnings (P/E) Ratio?
The P/E ratio compares a company’s stock price to its EPS, helping assess the value of shares.
Q: How does IFRS differ from ASPE in EPS reporting?
A: IFRS requires both Basic and Diluted EPS to be reported, while ASPE does not require EPS calculations or disclosures.
