Earnings Per Share Flashcards
How is book value per share of common stock calculated?
Total Shareholder Equity- Total Preferred Stock- P/S Dividends in Arrears- P/S Liquidation Premium = Total Book Value
Book Value per Share = Total Book Value / Shares outstanding
How is basic Earnings Per Share (EPS) calculated?
(Net Income - Preferred Dividends) / Average C/S Outstanding
Note - If cumulative- subtract the P/S dividend regardless of whether or not they’re declared.
For EPS purposes- which date is used for calculation purposes when a stock split or stock dividend has occurred?
For EPS purposes- treat C/S stock splits or stock dividends as if they occurred at the beginning of the year- regardless of when actually issued during the year.
For which areas is EPS required to be shown?
EPS is only required to be shown for Income from Continuing Operations and Net Income.
All others (discontinued operations- extraordinary items) can be shown on the Financial Statements or in the notes.
When do stock options increase shares outstanding?
Only if they are dilutive, i.e., their exercise price is LESS than the market value.
If not- you ignore them in the calculation.
How is EPS calculated when convertible bonds are taken into consideration?
[Net Income + Bond Interest (Net of Tax)] / (Average Common Stock Shares + Convertible Equivalents)
Bond interest is added back because if converted- there would be no bond interest expense
Contingent Issue Agreements are included in Diluted EPS if contingency is met.
How is EPS calculated when convertible preferred stock is taken into consideration?
[Net Income + Preferred Dividends] / (Average Common Stock Shares + Convertible Equivalents)
Preferred dividends are added back because if converted- there would be no preferred dividend expense.
How do we calculate the weighted average of common shares outstanding?
Prorate the newly issued shares by multiplying them by the % of the year they were issued and adding to the beginning balance of shares. Be sure to include any stock dividends or splits as they affect all of the share amounts immediately preceding the dividend or split.
How do stock dividends and stock splits affect the weighted average of common shares calculation?
They are retroactive at their exercise date, so the dividends or splits affect the all of the amounts impacting the weighted average summary that immediately preceded the dividend or split.
How do stock splits affect the Basic EPS calculation when comparing it with prior years?
The method of stock split (2 for 1, 3 for 1, etc.) is applied to the weighted average number of common shares outstanding for all periods being compared in order to compare “apples to apples.”
What is the one main difference between GAAP and IFRS regarding Earnings Per Share?
Earnings Per Share based on any Extraordinary items are not reported as they don’t exist under IFRS.
How does the treasury stock method calculate diluted EPS?
By increasing the number of shares by the number that would have been issued had the options been exercised and using the proceeds from their being exercised to repurchase shares at the average market price. This should only be done if the option price is below the average market price, as it will result in an increased number of shares in the denominator relative to basic EPS.
