Basic EPS Net Income - Preferred Dividends Weighted Average Common Shares (WACS)

Computation of WACS – Text Page 813 w Jan ,000 shares outstanding w April 1 - issued 30,000 shares w July 1 - reacquired 39,000 shares w Nov 1 - issued 60,000 shares

Computation of WACS (authors’ approach) Fraction Shares of Year WACS Jan 1 -Apr 1 90,000 * 3/12 = 22,500 Apr 1- Jul 1 120,000 * 3/12 = 30,000 Jul 1- Nov 1 81,000 * 4/12 = 27,000 Nov 1-Dec ,000 * 2/12 = 23,500 Weighted avg. common shares (WACS) 103,000

Computation of WACS (alternative approach) Shares Months Month Shares Jan 1–Apr 1 90,000 * 3 = 270,000 Apr 1-Jul 1 120,000 * 3 = 360,000 Jul 1-Nov 1 81,000 * 4 = 324,000 Nov 1-Dec ,000 * 2 = 282,000 1,236,000  12 Weighted avg. common shares (WACS) = 103,000

Computation of WACS See E16-16 (part a) handout

DILUTION The reduction in EPS if securities that are potentially convertible or exercisable into common stock are converted or exercised

Stock Dividends and Splits u Require restatement of WACS before the stock dividend or split u Stock dividends or splits during the year are deemed to have been occurred at the beginning of the year u Stock dividends or splits after year-end but before issuance of the financials are likewise restated

Complex Capital Structures n Complex structures have convertible securities, options, warrants, or other rights whose conversion or exercise would reduce EPS n Only securities that reduce earnings per share (dilutive) are considered n Securities that increase earnings per share (antidilutive) are ignored

Measuring Dilutive Effect n Convertible securities: if-converted method n Options and warrants: treasury stock method

The If-Converted Method n The conversion of the securities into common stock is assumed to occur at the beginning of the year n The related interest effect (net of tax) is removed from net income n The weighted average number of shares is increased by the additional common shares assumed issued (at the beginning)

The Treasury Stock Method u Options and warrants (and their equivalents) are included in EPS computations u Options and warrants are assumed exercised at the beginning of the year u The proceeds from the exercise of options are assumed used to buy back common shares u The exercise price per share must be less than the market price per share for dilution to occur

Earnings per Share: Simple Capital Structures - Summary Single Presentation of EPS 1 Net Income less Preferred Dividends 2 Weighted Average Number of Common Shares Outstanding 3 EPS = Result in Step 2 Result in Step 3 4

Earnings per Share: Complex Structures - Summary Dual EPS Presentation Basic EPS Diluted EPS Dilutive Convertibles Dilutive Options and Warrants Dilutive Contingent Issues Net Income adjusted for interest (net of tax) and preferred dividends Weighted average number of common shares assuming maximum dilution

Earnings per Share: Complex Structures - Continue with E16-16 handout

Earnings per Share: Complex Structures - See Appendix 16B