Earnings Per Share

Question 1

For calculating EPS, how income available to common stockholders is determined?

Answer 1

The income available to shareholders is determined by deducting dividends declared in the period on non-cumulative preferred stocks (regardless whether they have been paid) and dividends accumulated in the period on cumulative preferred stock (regardless if they have been declared)

Question 2

What to watch out for preferred dividends?

Answer 2

• If company has cumulative PD, ignore what is paid or declared, but PD is deducted from NI to arrive at income available to calculate EPS.
• If noncumulative PD, account what is paid or declared

Question 3

What is earning per share formula?

Answer 3

• It equals income available to common shareholders / weighted average number of common shares outstanding (WACSO)
• or (NI - PD)/WACSO

Question 4

Does convertible securities matter in EPS calculation?

Answer 4

No. Ignore. But, recognized only when computing diluted EPS. Also, diluted stock options would be used in calculation of dilutive EPS

Question 5

What events affect WACSO retroactively or as if it happened at the beginning of the year?

Answer 5

A declared/distribution of stock dividend and stock split (no change to equity) must be treated retroactively as if they happened at the beginning of the year.
Also, EPS for all prior periods presented must be adjusted

Question 6

What is a dilutive security?

Answer 6

A dilutive security would produce an EPS number below basic EPS

Question 7

what is an “out of money” stock option?

Answer 7

Am “out of money” stock option is when the excise price exceeds the market price of the stock. It becomes antidilutive, which is equal basic EPS

Question 8

what is basic EPS vs. diluted EPS?

Answer 8

• Basic EPS: how much of a company’s earning attributable to each common share
• Diluted EPS: calculate a company’s EPS if all dilutive securities are converted to common stocks