EPS Flashcards
Basic EPS
measure of a company’s profitability that shows the portion of Net Income attributed to each outstanding share of commonstock
Diluted EPS
measure that considers the potential dilution of earnings that could occur if all convertible securities such as stock options, convertible bonds, and convertible preferred stock were converted into common stock
Which method provides a more conservative view and why?
Diluted EPS because it includes convertible shares in the denominator thus reducing the ratio
What are three objectives of EPS?
Assesses profitability
Provides comparability across companies
Tracks performance over time
Basic EPS formula
Income Available to Stockholders/Weighted Average Number of Shares Outstanding
Income Available to Stockholders
Net income
-Cumulative Preferred Stock dividend
-Noncumulative Preferred Stock dividend
When are cumulative preferred stock dividends deducted?
in the year accrued
When are noncumulative preferred stock dividends deducted?
in the year declared
How are shares sold to the public calculated for the WACSO?
Prorated for the portion of the year outstanding
How are stock dividends and stock splits calculated for WACSO?
Retroactively adjusted as if they’ve been outstanding the full year
How are treasury stocks calculated for WACSO?
Reduce WACSO
What capital structure would a company have to calculate diluted EPS?
Complex
What are the objectives of diluted EPS?
Reflects dilution
provides conservative view
enhances comparability
What does dilutive EPS indicate?
converting securities to common stock decreases EPS below basic EPS
What does antidilutive EPS indicate?
converting securities to common stock increases EPS above basic EPS
