3.6 Earnings Per Share (EPS) Disclosure

Earnings Per Share (EPS)

Earnings per share (EPS) must be disclosed on the face of the income statement for each source of income presented.

  • This includes:

    • Continuing operations.

    • Discontinued operations.

    • Overall net income on a per-share basis.

Calculating Earnings Per Share

The formula for calculating earnings per share for income from continuing operations or net income is:

EPS=Income (from continuing operations or net income)−Preferred DividendsWeighted Average Number of Shares of Common Stock Outstanding\text{EPS} = \frac{\text{Income (from continuing operations or net income)} - \text{Preferred Dividends}}{\text{Weighted Average Number of Shares of Common Stock Outstanding}}

  • Preferred Dividends: These are subtracted because preferred stockholders receive dividends before common stockholders. Preferred stock is more akin to debt, as preferred stockholders do not have voting rights.

  • The goal is to determine how much income is generated for common shareholders who have voting rights.

Common Shares Outstanding

To determine the number of common shares outstanding:

Common Shares Outstanding=Common Shares Issued−Treasury Stock\text{Common Shares Outstanding} = \text{Common Shares Issued} - \text{Treasury Stock}

  • Issued Shares: Shares that have been sold by the company.

  • Treasury Stock: Shares that the company has bought back. Treasury shares reduce the number of shares held by outside parties.

  • Treasury shares do not have rights (no dividends, no voting rights).

Preferred Dividend Calculation

To calculate preferred dividends:

Preferred Dividend=Number of Preferred Shares Issued×Par Value×Preferred Stock Percentage\text{Preferred Dividend} = \text{Number of Preferred Shares Issued} \times \text{Par Value} \times \text{Preferred Stock Percentage}

Example:

  • 5% preferred stock

  • 100,000 shares issued

  • $100 par value

  1. Calculate contributed capital: 100,000 \text{ shares} \times $100 \text{ par} = $10,000,000

  2. Calculate the dividend: 0.05 \times $10,000,000 = $500,000

Earnings Per Share for Discontinued Operations

The formula is:

EPS from Discontinued Operations=Gain or Loss from Discontinued ComponentNumber of Common Shares Outstanding\text{EPS from Discontinued Operations} = \frac{\text{Gain or Loss from Discontinued Component}}{\text{Number of Common Shares Outstanding}}

  • Do not subtract preferred dividends to avoid double counting.

Example Problem: Boyd Corporation

Boyd Corporation had:

  • Income before taxes: 7,500,0007,500,000

  • Loss on discontinued operations (pre-tax): 1,250,0001,250,000

  • Tax rate: 30%

  • Common stock outstanding: 5,000,000 shares

  • 5% preferred stock: 100,000 shares issued at $100 par

Income Statement Preparation

  1. Income before taxes: 7,500,0007,500,000

  2. Income tax expense: 0.30 \times $7,500,000 = $2,250,000

  3. Income from continuing operations (after tax): 7,500,000 - $2,250,000 = $5,250,000

  4. Loss on discontinued operations (after tax): 1,250,000 \times (1 - 0.30) = $875,000

  5. Net income: 5,250,000 - $875,000 = $4,375,000

Earnings Per Share Disclosures

From Continuing Operations

  1. Income from continuing operations: 5,250,0005,250,000

  2. Preferred dividend: 100,000 \text{ shares} \times $100 \text{ par} \times 0.05 = $500,000

  3. Income available to common shareholders: 5,250,000 - $500,000 = $4,750,000

  4. EPS from continuing operations: \frac{$4,750,000}{5,000,000 \text{ shares}} = $0.95

From Discontinued Operations

  • Loss from discontinued operations: 875,000875,000

  • EPS from discontinued operations: \frac{$875,000}{5,000,000 \text{ shares}} = $0.18 \text{ (loss)}

Net Income

Net Income EPS=Net Income−Preferred DividendsCommon shares outstanding\text{Net Income EPS} = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Common shares outstanding}}

  • Net income: 4,375,0004,375,000

  • Preferred dividend: 500,000500,000

  • EPS: \frac{$4,375,000 - $500,000}{5,000,000 \text{ shares}} = $0.77

Another calculation: $0.95 - $0.18 = $0.77