R17 EPS Ratios

Question 1

Basic EPS

Answer 1

Basic EPS =
(Net income - Preferred dividends)
—————————————————–
# of shares outstanding

Question 2

Diluted EPS (if you have a convertible bond)

Answer 2

Diluted EPS (if you have a convertible bond) =
[Net income - preferred dividend + interest*(1-T)]
—————————————————————————————–
[# of shares outstanding + # of shares converted from bonds]

Note: if interest*(1-T) / # of shares converted from bond is less than one, then it is dilutive. If not less than one, then it is anti-dilutive so you use basic eps or we disregard its calculation.

Question 3

Diluted EPS (if you have a convertible preferred stocks)

Answer 3

Diluted EPS (if you have a convertible preferred stocks) =
[Net income - preferred dividend + preferred dividend]
——————————————————————————————————-
[# of shares outstanding + # of shares converted from preferred stocks]

Note: if $ value of preferred dividends (ex. 4500) / amount of convertible preference shares (ex. 3000) equals to an answer greater than 1, then it is anti-dilutive, so we put basic eps as diluted eps or we disregard its calculation.

Question 4

Diluted EPS (if you have stock options)

Answer 4

Diluted EPS (if you have stock options) =
[Net Income - Preferred dividend]
———————————————————————
[# of shares outstanding + # of shares issued]

Note: stock options are always dilutive but still make sure that exercise price (ex. $40) is less than current stock price (ex. $50).

Question 5

Diluted EPS (if you have convertible bonds, convertible preferred stocks and stock options)

Answer 5

Diluted EPS (if you have convertible bonds, convertible preferred stocks and stock options) =
[Net income - Preferred dividends + Interest*(1-T) + Preferred dividends]
————————————————————————————————————————————
[# of shares outstanding + # of shares converted from bonds + # of shares converted from preferred stocks + # of shares issued]

Question 6

Gross profit margin

Answer 6

Gross profit margin =
Gross profit
——————-
Revenue

evaluates a firm’s profitability

Note: High margin ratios are desirable. A firm can increase its margins by either increasing selling price or by lowering costs, or both.

Question 7

Operating profit margin

Answer 7

operating profit margin =
operating profit
————————-
revenue

evaluates a firm’s profitability

Note: High margin ratios are desirable. A firm can increase its margins by either increasing selling price or by lowering costs, or both.

Question 8

Net profit margin

Answer 8

net profit margin =
net profit
—————-
revenue

evaluates a firm’s profitability

Note: High margin ratios are desirable. A firm can increase its margins by either increasing selling price or by lowering costs, or both.

Question 9

What are the 4 components of other comprehensive income (OCI)?
What formula can be used to calculate OCI?

Answer 9

The 4 components of OCI are:
1- Unrealized gains/losses from available for sale securities
2- Foreign currency translation adjustments
3- Unrealized gains/losses on derivative contracts used for hedging
4- Adjustments for minimum pension liability

Easy way to remember: OCI = ADCP (A for AFS, D for derivatives, C for currency and P for pension)

Note:
1- Only these 4 for U.S. GAAP BUT IFRS includes these 4 + a revaluation model
2- OCI reflects on the equity in the balance sheet

Formula to calculate OCI: Beginning equity + Retained Earnings +/- OCI = Ending equity
(solve for OCI)