Chapter 7 Section 2: Earnings per Share Flashcards
Who is required to present EPS under GAAP
All public entities, or those who have filed go to public
What is the difference between a simple and complex capital structure?
Simple is if it only has common stock outstanding
Complex if it convertible shares
What does a simple structure report?
How?
Just basic EPS
Income available to common shareholders/weighted-average number of shares outstanding
**inc available to commons = net inc - pref div declared (non-cumulative) or -preferred dividends that will be accumulated, regardless of declaration
How do you handle stock splits and dividends when calculating weighted-average shares outstanding?
Like they happened at the beginning of the year
What do you need to report when you have a complex structure?
How?
Basic and diluted EPS
Diluted = inc available to commons + int on dilutive securities/weighted average shares outstanding, assuming all are converted
How do you compute additional shares for convertible stock?
Number of shares issued
- (sh x exercise price/avg mkt price)
= additional shares outstanding. Add to WACO
Define dilutive and anti-dilutive
Why does it matter?
Dilutive means the average market price of the underlying common stock exceeds the exercise price.
Don’t include them if the exercise price is higher than the market price, because they won’t be exercised.
How do you get the interest on dilutive securities for diluted EPS?
Interest expense on convertible bonds x (1-tax rate)
What if you have dividends on convertible preferred stock?
Don’t subtract the dividends from net income, because we’re assuming they’ll be converted
Explain dilutive and antidilutive EPS
If the diluted EPS is higher than basic, don’t include it.
What do you do with contingent shares?
Include in basic EPS if they’re dilutive and conditions for issuance have been met.
Do you report cash flow per share?
NO. Never.
