F1M2 Flashcards
EPS and Public Reporting Topics
Basic EPS formula
Income available to share holders / Weighted average number of common shares outstanding
Income available to the common shareholders
Start with income from continuing operations and net income – dividends declared in the period on noncumulative preferred stock (regardless if its been paid) – dividends accumulated in the period on cumulative preferred stock (regardless if it has been declared).
Weighted average number of common shares outstanding formula
WACSO = Shares outstanding at the beginning of the period + Shares sold during the period (time weighted basis) – Shares repurchased during the period (on a time weighted basis) + Stock dividends and splits (retroactively adjusted) – Reverse stock splits (retroactively adjusted).
Diluted EPS formula
(Income available to the common stock shareholder + interest on dilutive securities) / Weighted average number of common shares (assuming dilutive securities are converted to common stock)
Out of the money
When stock options or warrant wont be exercised because the exercise price is higher than the market price.
Exercise (strike) price definition
Price at which a share can be bought.
Additional shares outstanding formula for dilutive EPS to be added to WACSO
Number of shares – ((number of shares * exercise price) / average market price)
Convertible bonds phrasing: $500,000 in 6 percent bonds convertible into 10 shares for each $1,000 bond. 34 percent tax rate.
$500,000 total/ one bond is $1,000 = 500 bonds.
500 bonds can each be converted into 10 more so. 500 *10 = 5,000. Add the 5,000 to denominator.
Interest on bonds net of tax. 0.06(percent bond) * $500,000 * (1-0.34)(tax rate). Add this interest to net income for effect on numerator.
Issuing a stock dividend
different than a regular dividend, they are issuing stocks in place of money so this changes the number of outstanding shares.
They are treated as if they were issued at the beginning of the year, so they are not weighted.
When calculating Basic EPS and there is a preferred cumulative stock:
The dividend accumulated during the period must be subtracted. not what was paid.
For a 10-Q interim report, gain on sale of equipment allocation
The entire amount of the gain on sale of equipment should be reported during the period incurred.
For a 10-Q interim report, a cumulative-effect loss resulting from a change in inventory valuation method was recognized a few days after interim period end.
The cumulative effect of the change in accounting principle would impact the retained earnings at the beginning of the year and should not be included as part of net income.
For a 10-Q interim report, an unexpected large expense is incurred that will benefit operations for the remainder of the year, how is it allocated?
from the quarter it is incurred in till the end of the year. so if it occurred in the 2nd quarter, the cost will be realized evenly over the current quarter and remaining two.
When provided basic EPS and tax rate and asked which security is dilutive, these are the steps to take:
convertible bonds: find out how much the firm will save and how many new common shares are created. Example: if it says “Seven percent convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock.” then take ($1,000.07(1-.3(tax rate))) = $49 saved if they are converted. But $49 per 40 new shares is 49/40 = $1.225 which can be compared to the basic eps provided.
Convertible preferred stock: example if it says “Six percent, $100 par cumulative convertible preferred stock, issued at par, with each preferred share convertible into four shares of common stock.” then the firm saves $6 (from 6% of $100) from not paying the preferred dividend. so saving $6 per 4 shares is 6/4= 1.50 which can be compared to the basic eps provided.
When doing convertible bonds dont forget to add _____ to net income.
Interest expense. % bond * share price or amount of bonds. dont forget about tax though.
