Earnings per share

Question 1

Basic EPS calculation

Answer 1

Income available to common shareholders

divided by

WACSO

Income available to common shareholders is net income less Preferred stock dividends

Question 2

Weighted Average Number of Common Shares Outstanding

or

WACSO

Answer 2

Shares outstanding at the beg of the period

+ Shares sold during the period (on a time-weighted basis)

• Shares reacquired during the period (on a time-weighted basis)

+ Stock dividends and stock splits (retroactively adjusted)

_- Reverse stock splits (retroactively adjusted) _

Weighted average number of common shares outstanding for the entire period

Question 3

Diluted EPS

Answer 3

Income availalbe to the common stock shareholder + interest on dilutive securities

**Divided by **

Weighted-average number of common shares, assuming all dilutive securities are converted to common stock

Question 4

Formula for additonal shares for options and similar instruments

Answer 4

Number of shares x excercise price (cash received)

divided by

Average market price (number of shares repurchased)

Question 5

Contigent shares (that are dilutive) are included in the calculation of EPS if all conditions for issuance are met.

Answer 5

Stock options do not enter into the calcuatlion of EPS.

Question 6

Remember to do weighted average when caluclating number of shares for calcuation of EPS

Answer 6

Issued on May 1

Issued on Aug 1

May 1-August 31= 4/12

Sept 1-December 31= 4/12

Question 8

Companies that have made a filing or are in the process of a filing with a regulatroy agencey are required to disclose EPS

Question 9

Shares issuable upon the excercise of a stock option are not considered contigent shares as the option holder is required to pay the strike price to excercise the options.

Question 10

If preferred stcok cumalative dividends is given for Year 1 and Year 2, but only year 2 net income is given, only use the percentage of dividends subtracted to get income available to shareholders.

Answer 10

It also doesnt matter when they are paid, just when they cumulate, so if it gives you a amount paid in a question that has the cumaltive percentage, ignore the amount paid.

Question 11

If a stock split occurs mid year, what do you do in calculation of WACSO?

Answer 11

Retroactively do the stock split, and any shares after that are weighted. So if a stock split occurs on 5/1, use the number of shares listed for previous months and the stock split month, then if more are issued on 8/1, weight them.

Question 12

Stock splits are retroactive from when?

Answer 12

From the beginning of whenever the question asks, not just the year or period.

Also, all shares are split then weighted if need be (shares bought back for example).

Question 13

How should interest expense (net of income tax) be treated in determining EPS?

Basic EPS?

Diliuted EPS?

Answer 13

• Basic EPS- ignored
• Diluted EPS- added back to net income (numerator)

Question 14

Remember when they are asking for BASIC EPS, to ignore distractors such as convertible bonds and income tax rates.

Answer 14

Net income - Preferred dividends

Divided by

WACSO

Question 15

Diluted EPS, remember to ADD BACK interest expense on bonds and deduct the tax from that interest expense to net income.

Answer 15

Remember that when there is a convertble option, to think that it HAS to be converted, so if there is 50,000 shares of bonds that can be converted into common stock, then that must be added to total shares in the denominator of WACSO.

Question 16

Example of weighted average caluclation

Answer 16

Shares outstanding at 1/1- 200,000 x 12/12= 200,000

Stock dividend at 3/31- 24,000= 224,000 x 6/12= 112,000

Stock issuance at 6/30- 5,000= 229,000 x 6/12= 114,500

Total= 112,000 + 114,500= 226,500.

Stock dividends must be treated as if they occured at the beginning of the year, therefore you would treat them if they occured from 1/1-6/30, until the new stock issuance.

Question 17

In computing bond interest expense, what do you do with the discount that is being amortized throughout the year?

Answer 17

You add it back to the numerator.

Question 18

Both extraoridinary items and income before extraordinary items should be shown with an earnings per share number on the income statement.

Question 19

When trying to figure out if a certain security will be dillutive (below basic EPS), then what should you do.

Answer 19

Convert the security to the interest rate, i.e 1,000 x .10= $100, then divide it by the shares, i,e, convertible into 10 shars, $100/10= $10.00

If EPS if $11.00, then it is dillutive.

Question 20

How are the conversion of preferred shares into common shares treated in WACSO?

Answer 20

They are weighted and then added back into WACSO.

Question 21

Treasury stock method

Formula and reasoning

Answer 21

The treasury stock method presumes that option proceedds can be used to reacquire shares on the open market and that any option requirmenet will be satisfied by the issuance of new shares to be held in treasury. T**reasury shares themselves do not have an impact on the calculation, just the options. **

Number of shares-(number of shares x excercise price/average market price)=

Additonal shares outstanding

Question 22

Remember, with the weighed average method, sock dividends must be adjusted for each previous period, even if no activity had occured.