28.4: Earnings Per Share

Simple Capital Structure

contains non potentially dilutive securities

contains only common stock, nonconvertible debt, and nonconvertible preferred stock

Complex Capital Structure

contains potentially dilutive securities

contains stock options, warrants, and convertible securities

Stock Dividends

distribution of additional shares to each shareholder in an amount proportional to their current number of shares

Stock Split

divides all outstanding shares into more shares and reduces the price per share proportionally

Main idea behind stock dividends and stock splits

Each shareholder’s proportional ownership does not change by either of these events

True or False: When shares are exchanged for the purchase of an asset, these shares are included in the Weighted Average Shares Outstanding.

True

Dilutive Securities

stock options, warrants, convertible preferred, and convertible debt that decrease EPS if exercised

With Dilutive EPS, what adjustments need to be made from Basic EPS?

• Subtract preferred dividends

• Add back convertible preferred dividends

• Add back after-tax interest expense from convertible debt

Antidilutive Securities

stock options, warrants, convertible debt, and convertible preferred that increase EPS if exercised

If there are antidilutive securities, how is the treatment of EPS adjusted?

you do not add the effects of diluted securities at all

When are stock options and warrants dilutive?

Only when their exercise prices are less than the average market price of the stock over the year

What method do you use to calculate the weighted average shares outstanding for stock options and warrants?

Treasury Stock Method

Treasury Stock Method

assumes the funds received from exercising the stock options are used to repurchase shares in the market at the average market price

the value of the additional increase in the denominator is equal to the number of shares created by the options exercised less the number of shares repurchased in the open market