Income Statement :- EPS Flashcards
Potentially Dilutive Securities
These securities include stock options,warrants,convertible debt and convertible preferred stock
Dilutive Securities
Those securities that would decrease EPS if exercised and converted to common stock
Antidilutive Securities
Those securities that would increase EPS if exercised and converted to common stock
Simple Capital Structure
A capital structure that contains no potentially dilutive securities. This structure contains only common stock,non convertible debt and non convertible preferred stock
Complex Capital Structure
Complex Structure contain potentially dilutive securities such as options,warrants or convertible securities
Weighted Average No of Shares Out Standing
Each share issue is weighted by the portion of the year it was outstanding . Stock splits and stock dividends are applied retroactively to the beginning of the year so old share are converted to new shares for consistency

Dilutive EPS :- Convertible Debt

Dilutive EPS :- Convertible Debt

Dilutive EPS :- Convertible Debt

Dilutive EPS :- Stock Option
Diluted EPS
= Net Income - Preferred Dividend
/
Weighted Average Shares + Shares Issuable from Stock Options
Dilutive EPS :- Stock Option Question

Dilutive EPS :- Stock Option Question

Treasury Stock Method
Options and warrants are dilutive whenever the exercise price is less than the average stock price over the reporting period
The treasury stock method assumes that the hypothetical funds received by the company from the exercise of options or warrants are used to purchase shares of the company’s common stock at the average market price over the reporting period

Treasury Stock Method :- Example

Stock Options
Diluted EPS= Net Income - Preferred Dividend/ Weighted Average Shares + Shares Issuable from Stock Options

Stock Options

Convertible Preferred Stock

Convertible Preferred Stock Question

Convertible Preferred Stock Question

During 2004, Covax Corp. reported net income of $2.4 million and 2 million shares of common stock. Covax paid cash dividends of $14,000 to its preferred shareholders and $30,000 to its common shareholders. In 2004, Covax issued 900, $1,000 par, 5.5 percent bonds for $900,000. Each bond is convertible to 50 shares of common stock. Assume the tax rate is 40%. Compute Covax’s basic and diluted EPS.
Basic EPS Diluted EPS
$1.19 $1.18
$1.19 $1.22
$1.22 $1.22
2004 Basic EPS: 2,400,000-14000/2000000 = 1.19
2004 Diluted EPS: 2,400,000-14000 + 49500 (1-0.4) divided by 2,000,000 + 45000 = 1.18
Selected information from Able Company’s financial activities is as follows:
Net Income was $720,000.
1,000,000 shares of common stock were outstanding on January 1.
1,000 shares of 8%, $1,000 par value preferred shares were outstanding on January 1.
The tax rate was 40%.
The average market price per share for the year was $20.
6,000 shares of 3%, $500 par value preferred shares, convertible into common shares at a rate of 40 common shares for each preferred share, were outstanding for the entire year.
Able’s basic and diluted earnings per share (EPS) are closest to:
Basic EPS Diluted EPS
$0.55 $0.55
$0.55 $0.52
$0.64 $0.64
Able’s basic earnings per share ((Net Income − Preferred Stock Dividends) / weighted average shares outstanding) for 2004 was [($720,000 − ($500 × 6,000 × 0.03) − ($1,000 × 1,000 × 0.08)] / 1,000,000 = $0.55. If the convertible preferred were converted to common stock on January 1, 6,000 × 40 = 240,000 additional shares would have been issued. Also, dividends on the convertible preferred would not have been paid.
So diluted EPS was ($720,000 − 80,000) / (1,000,000 + 240,000) = $0.52.
Lawson, Inc.’s net income for the year was $1,060,000 with 420,000 shares outstanding. Lawson has 2,000 shares of 8%, $1,000 par value convertible preferred stock that were outstanding the entire year. Each share of preferred is convertible into 50 shares of common stock. Lawson’s diluted earnings per share are closest to:
A)$2.04.
B)$1.94.
C)$2.14.
Lawson’s basic EPS ((net income – preferred dividends) / weighted average common shares outstanding) is ($1,060,000 – (2,000 × $1,000 × 0.08)) / 420,000 = $2.14. To calculate diluted EPS the convertible preferred shares are presumed to have been converted, the preferred dividends paid are added back to the numerator of the EPS equation, and the additional common shares are added to the denominator of the equation. Lawson’s diluted EPS is $1,060,000 / (420,000 + 100,000) = $2.04.
The equation for Basic EPS (net income – preferred dividends / weighted average number of common shares outstanding) does not include the number of preferred shares outstanding, because the objective is to determine the earnings available to the common shareholder.
For an organization with a simple capital structure, the computation of earnings per share is least likely to consider:
A)net income.
B)the weighted average number of common shares outstanding.
C)the weighted average number of preferred shares outstanding.
The equation for Basic EPS (net income – preferred dividends / weighted average number of common shares outstanding) does not include the number of preferred shares outstanding, because the objective is to determine the earnings available to the common shareholder.
Savannah Corp.’s financial accounts for the year ended December 31 included the following information:
Net Income: $122,000
Preferred Stock Dividends Paid: $35,000
Common Stock Dividends Paid: $42,000
Common Shares outstanding at January 1: 50,000
10% preferred $100 par value shares outstanding at January 1: 3,500
No stock transactions occurred during the year and all preferred stock dividends were paid. Basic earnings per share for Savannah are closest to:
A)$0.90.
B)$2.44.
C)$1.74.
Savannah Corp.’s basic EPS ((net income – preferred dividends) / weighted average number of common shares outstanding) was (($122,000 − $35,000) / $50,000 =) $1.74.


