When computing diluted earnings per share stock options

There are some basic rules for calculating basic and fully diluted ESP in a complex capital structure. The basic ESP is calculated in the same fashion as it is in a simple capital structure. Basic and fully diluted EPS are calculated for each component of income: Treat conversion as occurring at the beginning of the year or at issuance date, if it occurred during the year additive to denominator.

Eliminate related interest expense, net of tax additive to numerator. Eliminate preferred dividend from numerator decrease numerator. Furthermore, use the most advantageous conversion rate available to the holder of the security.

Calculating Basic and Fully Diluted EPS in a Complex Capital Structure

Assume that exercise occurred at the beginning of the year or issue date, if it occurs during the year. Assume that proceeds are used to purchase common stock for treasury stock.

They are convertible to 1, shares of common stock. Each stock option is convertible to 10 common stocks. As a result the WASO would increase to 2,, Since the debt would be converted, no interest would have to be paid. The interest expense would flow through to common stockholders but not before the IRS get a portion of it.

If the stock is converted the company would have to issue an additional 2, shares of common stock. Since dividends are not tax deductible, there are no tax implications. The holders of the stock option can convert their options into stock for a profit at any point and time.

The holders of the stock option would not convert their options, because it would be cheaper to purchase the stock on the open market. Simple capital structure a. Basic EPS is presented for income from continuing operations, income before extraordinary items or change in accounting principle, and net income.

Reported for all accounting periods presented c. Prior-period EPS is restated for any prior-period adjustments. Footnotes are required for stock splits and stock dividends.

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Complex capital structure a. Basic and fully diluted EPS are presented for income from continuing operations, income before extraordinary items or change in accounting principle, and net income.

Footnotes are required for diluted EPS. Dictionary Term Of The Day. A measure of what it costs an investment company to operate a mutual fund.

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To calculate fully diluted EPS: To understand this complex calculation we will look at each possibility: If the company has convertible bonds, use the if-converted method: If the company has convertible preferred stock, use the if-converted method: Options and warrants use the treasury-stock method: Calculate the fully diluted EPS 1.

Convertible debt Assume conversion: Convertible preferred stock Assume conversion: Stock options If-converted method: The out-of-the-money option can be ignored. The in-the-money options need to be accounted for. Here is how in-the-money options are accounted for: Investors need to be aware of the existence of dilutive securities and how they can affect existing shareholders.

Find out if management is doing its job of creating profit for investors.

Share dilution reduces the value of an individual investment and can drastically impact a portfolio. These securities offer an answer for investors who want the profit potential of stocks but not the risk.

What Is the Formula for Calculating Diluted Earnings Per Share? -- The Motley Fool

What are convertible securities and why you should include them in your portfolio. Ever wondered what exactly a convertible bond does? Read the features of a convertible bond and learn how important the conversion factor is to you as an investor.

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