Vol. 3 LM1 Earnings Per Share Flashcards
(Capital Structure)
input into ratios such as the price/earnings ratio
earnings per share (EPS)
(Capital Structure)
IFRS and US GAAP both require the presentation of EPS on the face of the income statement for __________ and __________ from continuing operations.
net profit or los (net income) [and];
profit or loss (income)
(Capital Structure)
FASB ASC Topic 260 [Title name]
Earnings Per Share
(Capital Structure)
EPS is covered where in IAS and ASC respectively?
IAS No. 33;
FASB ASC Topic 260
(Capital Structure)
Under IFRS, te type of equity for which EPS is presented is referred to as _________
ordinary
(Capital Structure)
____ are those equity sares that are subordinate to all other types of equity.
ordinary shares
(Capital Structure)
____ are the equity holders who are paid last in a liquidation of the company and who benefit the most when the company does well.
ordinary shareholders
(Capital Structure)
Under US GAAP, ordinary equity is referred to as ____ or ____, reflecting US language usage.
common stock [or] common shares
(Capital Structure)
examples of financial instruments that are potentially convertible into common stock
· convertible bonds
· convertible preferred stock
· employee stock options
· warrants
(Capital Structure)
complex capital structures affect the calculation of EPS in which ways?
They contain convertible financial instruments, which risk conversion or exercise, potentially diluting or decreasing EPS.
Define
Diluted EPS
if all dilutive financial instruments were converted into common stock.
Describe
Basic EPS
the amount of income available to common shareholders divided by the weighted average number of common shares outstanding over a period
Calculation
Basic EPS
Basic EPS = (Net income - Preferred dividends) /
Weighted average number of shares outstanding
Describe
income available to common shareholders
the amount of net income remaining after preferred dividends (if any) have been paid.
Company B began the year with 2,000,000 shares.
They repurchased 100,000 shares on July 1.
What is the weighted average number of shares outstanding for use in basic EPS calculation?
[Note July 1 is exactly halfway through the year]
2,000,000 x 0.5 + (1,900,000 x 0.5) = 1,950,000 shares.
July 1 = (2,000,000 - 100,000) = 1,900,000
FYE 2018, Shopalot had net income of $1,950,000. The company had 1,500,000 shares of common stock outstanding, no preferred stock, and no convertible financial instruments.
What is Shopalot’s basic EPS?
$1,950,000 / 1,500,000 shares = $1.30
FYE 2018 Dec 31, $2,500,000 net income.
Company paid $200,000 of dividends on preferred stock.
Jan 1: 1,000,000 shares outstanding
Apr 1: 200,000 shares issued
Oct 1: 100,000 repurchased (treasury shares)
What is the weighted average number of shares outstanding?
Jan 1: 1,000,000 shares
Apr 1: 1,200,000 shares
Oct 1: 1,100,000 shares
1,000,000 x (3/12) = 250,000
1,200,000 x (6/12) = 600,000
1,100,000 x (3/12) = 275,000
= 1,125,000
FYE 2018 Dec 31, $2,500,000 net income.
Company paid $200,000 of dividends on preferred stock.
Jan 1: 1,000,000 shares outstanding
Apr 1: 200,000 shares issued
Oct 1: 100,000 repurchased (treasury shares)
What is the company’s basic EPS?
[($2,500,000-$200,000) /
(1,000,000x(3/12)+1,200,000x(6/12)+1,100,000x(3/12))]
=$1.02 EPS
Describe
if-converted method
based on what EPS would ave been if the convertible preferred securities had been converted at the beginning of the period
FYE 18, a utility company had net income $1,750,000.
Average of 500,000 shares of common stock,
20,000 shares of convertible preferred, at 5 shares per,
no other potentially dilutive securities;
What is the if-converted diluted EPS?
$1,750,000 - $0 (preferred dividend)
500,000 is the stated weighted average number of shares outstanding +
20,000 x 5 = 100,000
$1,750,000 / 600,000 = $2.92
Calculate
Diluted EPS with convertible debt outstanding
(Net income + after-tax interest on convertible debt - preferred dividends) /
(weighted average number of shares outstanding + additional common shares that would have been issued at conversion)
Define
Diluted EPS Treasury Stock Method
When a company has stock options, warrants, or their equivalents outstanding, diluted EPS is calculated as if the financial instruments had been exercised and the proceeds from exercise had been used to repurchase as many shares of stock as possible
Calculate
Diluted EPS Treasury Stock Method
Company has net income of $2,300,000 FYE June 30;
Company has weighted average shares outstanding 800,000 common stock;
30,000 options wit an exercise price of $35.
No other dilutive financial instruments;
market price of stock averaged $55.00
Calculate basic and diluted EPS using treasury stock method
Option exercise: 30,000 x $35 = $1,050,000;
30,000 options -> 30,000 shares would be outstanding;
$1,050,000 / $55 = 19,091 shares repurchased;
Diluted: $2,300,000 / (800,000+10,909) = $2.84
Basic: $2,300,000 / 800,000 = $2.88
Under US GAAP, what securities are not included in diluted EPS calculation?
antidilutive securities
A utility company has net income $1,750,000;
weighted average shares outstanding;
20,000 shares convertible preferred at $10 into 3 shares
Calculate diluted EPS using if-converted method
$1,750,000
- 0 (preferred dividend)
divided by
500,000 weighted average number of shares
60,000 if converted (20,000 x 3 shares per)
diluted EPS = $3.13
When a company has convertible preferred stock outstanding, diluted EPS is calculated using
if-converted method
For the year ended 31 December 2018, Bright-Warm Utility Company
(fictitious) had net income of $1,750,000.
The company had an average of 500,000 shares of common stock outstanding, 20,000 shares of convertible preferred, and no other potentially dilutive securities.
Each share of preferred pays a dividend of $10 per share, and each is convertible into five shares of the company’s common stock.
Calculate the company’s basic and diluted EPS.
