Basic Earnings per Share - Simple Capital Structure
Net Income - Applicable preferred dividends
Weighted-average number of common shares outstanding*
Separately state or disclose EPS on the face of the I/S for:
(1) Income from Continuing Operations
(2) … from Discontinued Operations (net of tax)
(3) … from Extraordinary Items (net of tax)
(4) … Cumulative effect of changes in acctg. principles (net of tax)
(5) Net Income
*stock dividends & stock splits are treated as if they occurred on the first day of the year
Diluted Earnings per Share - Complex Capital Structure
Increased Net Income - Decreased preferred dividends
Increased Wtd.-average common shares outstanding
STEP 1: Calculate Basic EPS
STEP 2: Identify potentially dilutive securities
STEP 3: Disregard antidilutive securities (based on the security
holder’s most advantageous conversion or exercise) [in reference to
Income Before Extraordinary Items & Accounting Change]
STEP 4: Calculated Diluted EPS
*takes into account the effect of all dilutive potential common shares
that would have been outstanding if issued
Diluted Earnings per Share - Finding Dilutive Securities
CONVERTIBLE SECURITIES -- use if converted method
(1) Increase income:
(a) representing the related preferred dividends
(b) for the after tax interest expense (1-TaxRate)(IntExp)
(2) Increase the weighted average shares outstanding
* assumes conversion at the earliest possible date that it could have
occurred
* if convertible debt was issued at a premium or a discount, the
interest expense (net of tax) must be computed after giving
consideration to amortization
Diluted Earnings per Share - Finding Dilutive Securities
OPTIONS & WARRANTS -- use Treasury Stock Method
# shares issuable times the Exercise/option price per share =
Proceeds rec’d from the assumed exercise of options/warrants
Proceeds rec’d from assumed exercise of options/warrants
Divide by ave market price per share = # treasury shares acquired
# share issuable
- # treasury shares acquirable
= incremental # of shares (assumed issued & not reacquired)
* assumes issuance at the beginning of the year
Diluted Earnings per Share - Finding Dilutive Securities
Contingent Issue Agreement
If these shares are issuable upon the mere passage of time or upon
the attainment of a certain earnings or market price level, and
this level is met at the end of the year, they should be considered
as outstanding for the computation of earnings per share.