M8- Earnings Per Share Flashcards
- What is the basic formula used for calculating EPS?
a. Income available to common shareholders / Weighted average number of common shares outstanding
- Name the potentially dilutive securities or instruments
a. Stock options and warrants and their equivalents
b. Convertible securities (bonds or preferred stock)
c. Contracts that may be settled in stock or cash
d. Contingent issuable shares
- Compare basic and diluted EPS
a. Basic: Simple capital structure (only common stock outstanding)
i. Income available to common shareholders/ weighted average common shares outstanding
b. Diluted: Complex capital structures
i. Income available to common shareholders assuming conversion of all dilutive securities / Weighted average common shares outstanding after conversion of all dilutive shares
- What is the anti-dilution rule?
a. Any conversion, exercise, or contingent issuances that has an anti-dilutive effect (increases EPS or decreases loss per share) is not included in the calculation unless the shares have actually been converted, exercised, or satisfaction of the contingency met.
b. Each potential common share is considered separately in sequence from most to least dilutive, with in-the-money options and warrants generally included first.
- List the reporting requirements for EPS
a. Face of income statement, with equal prominence for basic and diluted per-share amounts, for both income from continuing operations and net income/.
b. Per-share amounts for discontinued operations can be reported on the income statement or in the notes to the financial statements
When calculating EPS and NI – preferred dividends
1. What do you do if preferred stock is cumulative?
a. Amount deducted is the total dividend for the period whether it is declared or not
When calculating EPS and NI – preferred dividends
2. What do you do if the preferred stock is non-cumulative
a. The amount to be deducted is the amount actually declared during the current period.
When calculating EPS and NI – preferred dividends
3. Why is preferred dividends subtracted from NI?
a. The adjustment is made to convert net income to the amount of earnings applicable to common stock only.
When calculating EPS and NI – preferred dividends
4. How are dividends in arrears handled?
a. Ignored
b. Preferred dividends for the prior periods should have already been considered
When calculating EPS and NI – preferred dividends
5. What happens if there are preferred dividends and a net loss?
a. Preferred dividends are added to the net loss for the purposes of computing the loss per share
When assessing dilution:
1. How do you know when dilution exists?
a. If average price > strike (exercise) price
When assessing dilution:
2. When is the treasury stock method used?
a. Used for options, warrants and equivalents
When assessing dilution:
3. What is the treasury stock method:
a. Based on the assumption that the options or warrants are exercised at the beginning of the period and the proceeds from the exercise used to purchase outstanding common stock that would then become treasury stock
When assessing dilution:
4. What is the dilutive effect:
a. The net increase in outstanding shares from the assumed sale of the shares and the re-acquisition of outstanding shares with the proceeds from the exercise of the options and warrants
When assessing dilution:
5. What is the formula for the treasury stock method?
a. Additional number of shares – [(number of shares x exercise price)/ average market price ]
