Set 7 FR 24 EPS

Question 1

Two types of EPS?

Answer 1

Basic and Diluted

Question 2

Formula for Basic EPS

Answer 2

Net earnings (loss) available to common shareholders / weighted average common shares outstanding (WACSO)

Question 3

What is net earnings (loss). How do dividends factor in? Cumulative and non-cumulative?

Answer 3

Net profit (loss) for year, minus any dividends on preferred shares. Cumulative preferred - deduct div owed in year, regardless if declared. Non-cumulative - deduct only declared dividends. ONLY DIVIDENDS FOR THE YEAR IN QUESTION ARE USED.

Question 4

Determining WACSO for Basic EPS - two factors

Answer 4

1. Treasury shares issued but not o/s are NOT included.
2. IFRS requires share split/stock split are treated as if they are split at the beginning of the period. So if a split occurs in November, you have to treat WACSO as if the split happened in Jan.

Question 5

Formula for Diluted EPS

Answer 5

Net earnings available to common shareholders + income effect of dilutive EPS / WACSO + share effect of dilutive EPS

Question 6

5 step process to get diluted EPS

Answer 6

• Calculate basic EPS
• identify all POTENTIAL common shares (dilutive)
• calculate incremental EPS for each class of PCS convertible bonds, convertible preferred shares, options, warrants
• Order incremental EPS of PCS from lowest (most dilutive) to highest (least dilutive)
• Recompute provisional EPS moving from lowest PCS to highest until diluted EPS is determined.

Question 7

Incremental EPS formula

Answer 7

Income impact of PCS / Share impact of PCS

Question 8

Convertible bond Income impact

Answer 8

Bond CV x effective interest rate x (1 - tax rate)

Question 9

Convertible bond Share impact

Answer 9

Add shares issued on conversion

Question 10

Convertible preferred shares income impact.

Answer 10

Adjust for annual dividend entitlement, weight for part of year o/s.

Question 11

How to calculate annual dividend entitlement

Answer 11

• dividends on cumulative preferred shares are considered whether declared or not.
• • dividends on non- cumulative preferred shares are considered ONLY when declared.

Question 12

Convertible preferred shares share impact

Answer 12

Add number of shares on conversion to common shares. If issued during year, weight for part of year o/s.

Question 13

define in the money

Answer 13

exercise price is lower than market value

Question 14

In-the-money stock options income impact

Answer 14

none

Question 15

In-the-money stock options share impact

Answer 15

of options x (market price - exercise price) / market price

Question 16

How to calculate annual dividend entitlement

Answer 16

• dividends on cumulative preferred shares are considered whether declared or not.
• • dividends on non- cumulative preferred shares are considered ONLY when declared.

Question 17

define in the money

Answer 17

exercise price is lower than market value

Question 18

step 4 - ordering PCS. Which will always be first (most dilutive)

Answer 18

in-the-money stock options

Question 19

are both dilutive and anti-dilutive considered when recomputing EPS?

Answer 19

No, just dilutive.

Question 20

Step 5 process to recompute EPS

Answer 20

1. compare incremental EPS of most dilutive to basic EPS.
2. If incremental EPS < basic EPS, include EPS in diluted computation. Calculate provisional EPS.
3. Once provisional EPS > the next PCS, stop.