Earnings per Share - FAS
128
A. Simple Capital
Structure
Determine income applicable to common
stock
Determine weighted average # of
common shares outstanding
Divide income applicable to common
stock by weighted average # of common
shares outstanding
Determination of weighted average number of common stock (wac) outstanding:
X company, year 1
Example:
1-Jan
1-Apr
1-Jul
1-Oct
31-Dec
# shares outstanding
# of months outstanding/12
# shares outstanding
50000
75000
75000
90000
100000
25.00%
12500
25.00%
18750
25.00%
18750
25.00%
22500
0.00%
weighted average number of shares outstanding:
72500
Alternative method:
1-Jan
# shares outstanding
additional issued
# 0f months outstg/12
1-Apr
1-Jul
1-Oct
25000
3/4
18750
0
15000
1/4
3750
31-Dec Total
50000
1
50000
Net income
preferred dividends
income available for common stockholders
weighted average number of common stock
Earnings per share
0
10000 100000
$ 200,000
$ 20,000
$ 180,000
72500
$
2.48
Additional issues:
Stock splits and stock dividends are assumed to have occurred at the beginning
of the year for computation of weighted average number of shares.
For comparative multi year presentation, they are assumed to have occurred at the
beginning of the earliest year presented.
72500
Example: X company, year 2
no new stock is issued, but on July 1, year 2, the company issues a 10% stock dividend:
# of shares before stock dividend
stock dividend
total number of shares
100000
10000
110000
restatement of year 1:
1-Jan
# shares outstanding
additional issued
# 0f months outstg/12
alternatively:
weighted average 3 of shares
1-Apr
1-Jul
1-Oct
0
1
55000
27500
3/4
20625
16500
1/4
4125
72500
1.1
79750
31-Dec Total
55000
Net income
preferred dividends
income available for common stockholders
weighted average number of common stock
Earnings per share
# of shares
0
year 2
year 1
$ 300,000 $ 200,000
$ 20,000 $ 20,000
$ 280,000 $ 180,000
$
2.55
110,000
$
2.26
79,750
11000 110000
79750
Note: if shares are issued after stock split or stock dividend, they are not adjusted:
Year 3:
# of shares before 2:1 stock split
total number of shares
total number of shares
Net income
preferred dividends
income available for common stockholders
weighted average number of common stock
Earnings per share
# of shares
1-Apr
1-Jul
110,000 issued
220,000
10000
0.5
5000
225,000
Year 3
year 2
year 1
$ 500,000 $ 300,000 $ 200,000
$ 20,000 $ 20,000 $ 20,000
$ 480,000 $ 280,000 $ 180,000
$
2.13 $
225,000
1.27 $
220,000
1.13
159,500
B. Complex Capital Structure
In addition to common and preferred stock the company has any or all of the following:
convertible preferred stock or debt
stock options/warrants
contingent shares
Any of the above must be taken into consideration if and only if they are dilutive
Dilutive Ifsecurities:
included in the EPS calculation thye will reduce EPS
Step 1: Determine income applicable to common stock:
Step 2: Determine weighted average number of common stock outstanding:
Step 3: Determine if any dilutive securities are outstanding
Test to determine if securities are dilutive:
convertible bonds/preferred stock
a. Determine additional number of shares
> increase denominator
b. Determine interest expense (net of tax) or
preferred dividends
> increase numerator
c. Compute EPS: if lower than basic EPS > securities are dilutive, must be included
Warrants and options
a. Determine amount of cash resulting from exercise of options/warrants
b. Calculate # of treasury shares that could be purchased with the cash (average market price)
c. Determine net additional number of shares (denominator)
If the number is higher than under basic EPS > securities are dilutive
(simple rule: if exercise price is lower than average market price of stock,
securities are dilutive
Contingent shares: May be contingent onpassage of time (merger situation)
attainment of earnings or other goal
If contingency has been met > include shares
Example of complex capital structure:
Common stock
100000
convertible into
pref. stock ($100 par)
10000
8%
40000 shares of common stock
convertible bonds
$ 200,000
10%
4000 shares of common stock
exercise
market
cash
treasury stock
net shares
options
20000
45
50
900000
18000
2000
Net income
preferred dividends
income available to common stockholders
EPS (basic)
600000
80000
520000
5.2
Test for dilution
# shares
a. convertible preferred stock
net income
common stock
additional shares
EPS
520000
80000
600000
$
4.29 less than basic EPS, > dilutive, include
b. Convertible bonds# shares
common stock
100000
additional shares
4000
104000
EPS
net income
interest
tax
net
$ 520,000
20000
35%
13000
$ 13,000
$ 533,000
$
5.13 less than basic EPS, > dilutive, include
c. Options
common stock
additional shares
net income
$ 520,000
$
$ 520,000
$
5.10 less than basic EPS, > dilutive, include
EPS
100000
40000
140000
# shares
100000
2000
102000
All together now:
common stock
additional shares, preferred
additional shares, bonds
additional shares, options
fully diluted EPS
# shares
100000
40000
4000
2000
146000
net income
$ 520,000
$ 80,000
$ 13,000
$
$ 613,000
$
4.20
C. Earnings per share disclosure requirements
If applicable, EPS (basic and fully diluted) must be provided for Net operating income
extraordinary items
discontinued operations
cumulative effect of change in accounting principles