EPS Flashcards
what are earnings for share driven by?
companies corporate structure
What is EPS
income earned by each share of common stock
When is Basic EPS reported
when the company has a simple capital structure (meaning no dilutive securities)
When do we report basic EPS and Diluted EPS
when a company has a complex capital structure (has dilutive securities)
What does dilutive mean
has the ability to influence EPS in a downward direction
What is the basic EPS formula
Net income (after tax) - Preferred dividends/ weighted average outstanding common stock
when are preferred dividends subtracted
cumulative: current periods dividend declared or not
noncumulative: current periods dividend only if declared
How are stock dividends are splits treated in terms of EPS calc
they are treated retroactively
How is diluted EPS different?
includes the effect of all potential dilutive common shares that were outstanding
do companies report diluted EPS is the securities were antidilutive
no b/c chance of conversion is considered remote
what are anti-dilutive securities
securities that upon conversion or exercise increase earnings per share
what method do companies use when accounting for potential conversion of EPS
if-converted method
what do we assume for convertible bonds in terms of diluted EPS
- conversion happened at the beginning of the period
- related interest was eliminated (net of tax)…. since it isn’t a bond anymore the company doesn’t pay interest on it
what do we assume for convertible preferred stock in terms of diluted EPS
- conversion happened at the beginning of the period
- we don’t subtract preferred dividends… if they converted the preferred stock they wouldn’t get preferred dividends
what conversion rate (the number of shares they can convert to) is used when calculating shares outstanding for a dilutive securitiy
the company should use the most dilutive conversion rate they have available…(worst-case scenerio)
