Earnings per Share

Question 1

Disclosure requirements related to EPS

Answer 1

-Amount of earnings attributable to each share of common stock
- Disclosed on the Face of Income Statement: Basic EPS and Dilutive EPS
- Income from Continuing Operations per
share
- Net Income per Share
- Disclosed on the face of the Income Statement or notes to Accounts: Basic EPS and Dilutive EPS

• Do Not Disclose
• OCI or Comprehensive Income on a per share basis
• Cashflow per share.

Question 2

Basic EPS

Answer 2

-Simple Capital Structure
- Only common stock and no securities that convert to common stock

Basic EPS=
Net Income- Preferred Stock Dividends
————————————————————–
Weighted Avg. number of common shares outstanding

Preferred Stock Dividends
Non-Cumulative Preferred Stock Dividend- Deduct in the year declared

Cumulative Preferred Stock Dividend- Deduct every year irrespective of the fact whether declared or not.

Weighted Avg. Number of Common shared outstanding
- Number of shares determined for the portion of time they have been outstanding
- Stock Dividends, Stock Splits are adjusted retroactively.

Question 3

Dilutive EPS

Answer 3

-Complex Capital Structure
- Only common stock and convertible securities that convert to common stock
- Need to report Diluted EPS only if Dilutive, if ant-dilutive, diluted EPS is not Reported

Diluted EPS< Basic EPS= Dilutive & Disclose
Diluted EPS> Anti-dilutive & Do not disclose

Dilutive Securities
- Convertible Bonds
- Convertible Preference Shares
- Contracts that may be settled in Stock
-Options & Warrants

Question 4

Steps to Calculate Diluted EPS

Answer 4

1

Calculate Basis EPS

Calculate Diluted EPS for each Dilutive security

Question 5

Calculate Diluted EPS with Convertible Bonds

Answer 5

Diluted EPS

Weighted Avg. Number of common shared outstanding + new shared

Numerator
+ interest: Bonds convert into share, interest which was payable would no longer be payable and therefore added back

• income tax on interest: Interest saves taxes, if interest deduction reduces, tax payable would increase and therefore subtracted.

Denominator
Increase the number of shares as of beginning of period or as of date of issuance, if issued during the year.

Question 6

Calculate Diluted EPS with Convertible Preference Shares

Answer 6

Diluted EPS
Net income- Preferred Stock Dividends + Preferred Stock Dividends
————————————————————–
Weighted Avg. number of common shared outstanding + new shares

Numerator
+ Preference dividend: preferred stock converts into shared, no dividend would be paid and therefore add back if reduced.

Denominator
- Increase the number of shared as of beginning of period or as of date of issuance, if issued during the year.

Question 7

Calculate Diluted EPS with Contracts that may be settled in stock

Answer 7

Diluted EPS

Weighted Avg, number of common shares outstanding + new shares

Numerator
- loss: Expense on contracts would be reduced from net income

Denominator
Increases the number of shares as of beginning of period or as of date of issuance, if issued during the year.

Question 8

Calculate Diluted EPS with Options & Warrants

Answer 8

Diluted EPS
Net income- Preferred Stock Dividends
——————————————————–
Weighted Avg. Number of common shares outstanding + New shares

Numerator
No effect
Exercise price < market Price = Dilutive
Exercise Price > Market Price= Anti- Dilutive

Denominator
-Increase number of common stock outstanding assuming the options were exercised at the beginning of the period.

• Decrease number of common stock outstanding assuming the entity uses cash received from exercise of options to buy-back its common stock.
• This is calculated as follows:
  + or - number of share
  Exercise price * number of shares
  ———————————————-
  Avg. Market price