Diluted Earnings Per Share
Diluted Earnings Per Share Multiple Potentially Dilutive Securities
Summary
Summary Step 1 – Identify all potentially dilutive securities (PDS) Step 2 – Calculate Basic EPS Step 3 – Determine per share effect of each PDS Step 4 – Rank PDS from most to least dilutive Step 5 – Recalculate EPS adding one PDS at a time STOP – When all remaining PDS are anti-dilutive
Step 1 – Identify all potentially dilutive securities
Step 1 – Identify all potentially dilutive securities Convertible Preferred Stock Par Value/Share Total Shares Conversion Ratio Dividend Rate $ 4.00 10,000 1:1 10% Stock Options Shares Issuable Exercise Price Avg. Market Price 10,000 $ 25 $ 35 Convertible Bonds Carrying Value Effective Int. Rate Shares Issuable $ 60,000 12% 4,400 Tax Rate 30%
Step 2 – Calculate Basic EPS
Step 2 – Calculate Basic EPS Net Income Avg. Weighted Common Shares Outstanding $ 100,000 75,000 Preferred Dividend (4,000) Income to Common Shareholders $ 96,000 75,000 = $ 4.00 10,000 10% X = $ 40,000 x 4,000 Preferred Stock Dividend Income to Common Shareholders Weighted Avg. Shares Basic EPS $ 96,000 $ 1.28 Convertible Preferred Stock Par Value/Share Total Shares Conversion Ratio Dividend Rate $ 4.00 10,000 1:1 10% Net Income $ 100,000
Step 3 – Determine per share effect of each PDS
Step 3 – Determine per share effect of each PDS Effect on Income Effect on Shares = Incremental EPS 10,000 $ 4,000 $ .40 >/< $ 1.28 (Basic EPS) Potentially Dilutive! Convertible Preferred Stock Par Value/Share Total Shares Conversion Ratio Dividend Rate $ 4.00 10,000 1:1 10% Preferred Stock Dividend – Calculated in Step 2
Step 3 – Determine per share effect of each PDS
Incremental EPS Step 3 – Determine per share effect of each PDS Effect on Income Effect on Shares = >/< $ 1.28 (Basic EPS) Potentially Dilutive! $ 60,000 12% $ 7,200 Decrease in Interest Exp 70% $ 5,040 Increased Income Available to C.S. $ 5,040 4,400 $ 1.15 $ 60,000 Convertible Bonds Carrying Value Effective Int. Rate Shares Issuable 12% 4,400 Tax Rate 30% X Effect on Income X
Step 3 – Determine per share effect of each PDS
Step 3 – Determine per share effect of each PDS Effect on Income Effect on Shares = Incremental EPS >/< $ 1.28 (Basic EPS) Potentially Dilutive! $ 0 10,000 $ 25 $ 250,000 Proceeds from Exercise $ 35 7,142 Shares Purchased From Mkt 2,858 10,000 2,858 Additional Shares Needed Upon Assumed Exercise $ 0.00 Shares issued upon exercise 7,142 Shares Purchased From Mkt Stock Options Shares Issuable Exercise Price Avg. Market Price 10,000 $ 25 $ 35 Exercise of options would have no effect on income. Effect on Shares X ÷ ¯
How Do These PDS Work Together?
How Do These PDS Work Together?
Step 4 – Rank PDS from most to least dilutive
Step 4 – Rank PDS from most to least dilutive Rank Security Incremental EPS 1 2 3 Remember Basic EPS is $1.28 Convertible Bonds $ 1.15 Convertible Preferred Stock $ 0.40 Stock Options $ 0.00
Step 5 – Recalculate EPS adding one PDS at a time
Step 5 – Recalculate EPS adding one PDS at a time Stock Options + 0 + 2,858 Subtotal $ 96,000 77,858 $ 1.23 / = Is the next PDS still dilutive? Convertible Preferred Stock < $ 1.23 YES, Continue to next PDS Income Shares EPS / = Basic EPS $ 96,000 75,000 $ 1.28 / = $ .40 Incremental EPS
Step 5 – Recalculate EPS adding one PDS at a time
Step 5 – Recalculate EPS adding one PDS at a time Basic EPS $ 96,000 75,000 $ 1.28 / = Stock Options + 0 + 2,858 Subtotal $ 96,000 77,858 $ 1.23 / = Convertible Preferred Stock + 4,000 + 10,000 $ 100,000 87,858 $ 1.14 / = Is the next PDS still dilutive? Convertible Bonds > $ 1.14 Remaining Securities Are Anti-Dilutive Income Shares EPS / = Subtotal $ 1.15 Incremental EPS
Summary
Summary Step 1 – Identify all potentially dilutive securities (PDS) Step 2 – Calculate Basic EPS Step 3 – Determine per share effect of each PDS Step 4 – Rank PDS from most to least dilutive Step 5 – Recalculate EPS adding one PDS at a time STOP – When all remaining PDS are anti-dilutive