Module 21.4: EPS and Dilutive Securities Flashcards
What is the formula for basic EPS?
(net income - preferred dividends) / (weighted average number of common shares outstanding)
What is a stock dividend? What is the affect?
distribution of additional shares to each shareholder in an amount proportional to their current number of shares.
What is a stock split?
Refers to the division of each “old” share into a specific number of “new” (post-split) shares.
What are dilutive securities? antidilutive securities?
stock options, warrants, convertible debt, or convertible preferred stock that would decrease / increase EPS if exercised into common stock.
what happens to preferred dividends or interest income / tax expense associated with convertible bonds?
it gets added back to the numerator of the EPS formula.
What is the formula for diluted EPS?
Adjusted income available for common shares / weighted average common and potential common shares outstanding.
adjusted income = net income - preferred dividends + dividends on convertible preferred stock + after-tax interest on convertible debt.
When are stock options and warrants dilutive? what is method is used to calculate the number shares of used in the denominator?
only dilutive when their exercise prices are less than the average market price of the stock over the year.
Treasury stock method is the way to calculate impact to the denominator
What are the two assumptions of the treasury stock method?
1) assumes funds received by the company from the exercise of the options would be used to hypothetically purchase shares of the company’s common stock at average market price
2) net increase in shares is determined by exercising the option less the number of shares repurchased with proceeds.
What is the formula to calculate additional shares to include in the denominator using the treasury stock method?
[ (AMP - EP) / AMP ] x N
AMP = Average market price EP = exercise price N = number of common shares that the options can be converted into
