$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

1997 1998 1999 2000 2001

Basic

Diluted

Earnings Per Share

EPS 2

Importance of earnings per share information Historical performance of a corporation Predictive value

EPS 3

Objective of earnings per share information Present earnings per share possibilities No potential dilution Maximum dilution Antidilutive effect on earnings is not

considered

EPS 4

Two measures of earnings per share

Basic earnings per share– no potential dilution

Diluted earnings per share– maximum dilution

EPS 5

Applicability of SFAS #128 Public companies

– required to report

Non-public companies– optional

EPS 6

Basic earnings per share model

Basic EPS

adjusted net income

(ANI)

weighted average number of shares

outstanding during the period

(S)

=

EPS 7

Adjusted net income

Net income from continuing operations Reduced by preferred stock dividends which

have been declared or are cumulative

EPS 8

Weighted average number of common shares Stock splits/dividends during the period

– require restatement of weighted average

Stock splits/dividends subsequent to end of period but prior to issuance of financial statements– require restatement of weighted average

Includes contingently issueable shares if the necessary conditions have been satisfied

EPS 9

Diluted earnings per share model

Diluted EPS

adjusted net income (ANI)

+ income adjustment

weighted average number of shares outstanding during the period (S)

+ share adjustment

=

EPS 10

Call options and warrants “Treasury stock method” Capture potential dilution

–Share

Adjustment (SA)

total shares obtainable upon

exercise of security

exercise proceeds

average market price of shares

=

EPS 11

Call options and warrants computational guidelines Quarterly averaging technique

– if the reporting period is greater that 3 months, a quarterly averaging technique is employed

Which exercise price– use the lowest exercise price

EPS 12

Option computation

Shares TreasuryQuarter Obtainable Shares Aquired SA

1 12,000 $240,000 / $24 = 10,000 2,0002 12,000 240,000 / 22 = 10,909 1,0913 8,000 160,000 / 19 = 8,421 0

3,091

Example: 12,000 options of which 4,000 were exercised at the beginning of quarter 3. Exercise price equals $20.

SA: 3,091 3 quarters = 1,030 shares

EPS 13

Stock-based compensation arrangements Considered the same as options Outstanding at the grant date If dilutive, shares should be included in calculation of

DEPS regardless of employees’ rights to the shares Proceeds consist of:

cash which must be paid at exerciseunrecognized compensation costthe tax benefit on tax versus book difference

EPS 14

Contingently issued shares

Passage of time Passage of time along with other conditions Maintenance of some level of earnings Attainment of some level of earnings Changes in market price of shares Occurrence of events unrelated to earnings or

market price

Based on:

EPS 15

Contingently issued shares:Conditions satisfied Treatment in BEPS

– include in the calculation of the weighted average number of shares outstanding as of the end of the period in which the condition was satisfied

Treatment in DEPS– include in the calculation of the weighted average

number of shares outstanding as of the beginning of the period in which the condition was satisfied

EPS 16

Contingently issued shares:Conditions not yet satisfied Treatment in BEPS

– exclude from the calculation

Treatment in DEPS– if the future conditions would be satisfied

based on using the current existing conditions, include as before

– otherwise, exclude from the calculation

EPS 17

Convertible securities Types

– convertible bonds– convertible preferred stock

“If Converted” method– what would happen to the income and number

of shares used to calculate DEPS if the convertible security had been converted

EPS 18

If converted method:Convertible bonds

Example:– 1,000 8% $100 bonds issued on 4/1/20X4– issued at 102– each bond convertible into 4 common shares– bonds mature in 10 years– the effective tax rate is 30%

Calculate IA (income adjustment: net of tax effect on income assuming conversion) and SA (share adjustment).

EPS 19

If converted method:Convertible bonds (con’t)Income adjustment:1,000 bonds (8% $100) = 8,000 annual cash interest

2,000 premium 10 years = 200 premium amort7,800 effective interest exp

9/12 (April 1 - Dec 31) .7 (after-tax rate)$4,095 income adjustment

Share adjustment:1,000 bonds convert to 4,000 shares

9/12 (April 1 - Dec 31)3,000 share adjustsment

EPS 20

If converted method:Convertible preferred stock Dividends are a distribution of income, not

a component of income– income adjustment does not require a tax

effect

No amortization of premium or discount

EPS 21

Convertible securities:Special issues Variable conversion rates

– always use the conversion rate most favorable to the holder

Earnings per incremental share– evaluate the potential dilutive effect by

considering securities in the order of increasing incremental impact (IA SA)

EPS 22

Presentation of EPS information In comparative financial statements, if DEPS

is shown for one period, it should be shown for all periods

Requirements for interim are the same as annual requirements

EPS 23

Presentation of EPS Information (con’t) Share amounts for types of income other than

from continuing operations (e.g., extraordinary item)– can be shown on the face or in the notes to the

financial statements– these calculations use the same number of shares

as does the calculation for EPS from continuing operations

EPS 24

Special disclosure requirements Reconcile the numerator and denominator used

to calculate BEPS to those used for DEPS Preferred dividends effect in arriving at income

available to common stockholders for the BEPS calculation

Securities not included in DEPS, because their effect was antidilutive, which could effect BEPS in the future

EPS 25

Disclosure of information about capital structure All entities are required to disclose a summary of

the rights and privileges of various securities outstanding– for example: dividend and liquidation preferences,

exercise prices for options and warrants, convertible rates for securities to common stock

Entities must disclose number of shares issued during the past fiscal year or any subsequent interim periods