M2 Basic and Diluted EPS Flashcards
What is a Simple capital structure Vs. a Complex capital structure
-A simple capital structure is an entity that only issues common stock (nothing convertible into stock)
-A complex capital structure is an entity that has securities convertible to common stock (potentially diluting EPS)
How does a simple capital structure present per-share earnings? What is the formula?
Basic EPS For income from continuing operations and
for net income (on the face of the income statement)
Basic EPS =
Income available to common shareholders (NI less preferred dividends) / Weighted average # of common shares outstanding (WACSO)
How does a complex capital structure present per-share earnings
basic and diluted EPS
from continuing operations and for net income
(if the entity reports discontinued operations, they present basic and diluted per-share amounts for that item on the face or in the notes)
How do you calculate CUMULATIVE Preferred dividends
number of preferred shares * par value per share * rate (does not matter if declared or not)
How do you calculate NONCUMULATIVE Preferred dividends
Use the declared amount
How do shares sold effect shares outstanding
Increases shares outstanding
How do shares reacquired effect shares outstanding
reduces shares outstanding
How do stock dividends effect shares outstanding
Increase shares outstanding (retroactively adjusted to the beginning of the year)
How do reverse stock splits effect shares outstanding and how are they treated
Reduce shares outstanding (retroactively adjusted to the beginning of the year)
Should stock dividends and stock splits effect EPS if they occur after the end of the period but before the financial statements are issued?
Yes
What are the rules for stock issued in a business combination
Purchase price = Cash paid + Debt issued + Fair market value of the stock issued
What is the formula for Diluted EPS
(Income available to common stock shareholders + interest on dilutive securities net of tax) / WACSO (assume all dilutive securities are converted to C/S
How do options that are out of the money effect EPS
They are antidilutive, since it is unlikely they would be exercised they are not included in Diluted EPS
What is the Treasury stock method to calculate additional shares outstanding?
Number of shares -
((# of shares * exercise price) / average market price)
When should conversion methods be used for complex capital structures?
When they are dilutive, if they are antidilutive, they should be ignored. Each issue will be considered separately
