Acc 440 – Corporate Reporting
Earnings per Share
* The number that is reported most frequently in the media and receives by far the most attention by investors and creditors is earnings per share.
* Regulators impose standards to ensure the comparability of EPS across companies.
* This seems simple, Earnings / Number of shares outstanding …but it’s not.
* Earnings available to common shareholders for each share of stock outstanding.
* Ignores any potential common shares which might arise from convertible securities.
Net income (after tax) – Preferred dividends
...view middle of the document...
) = 3 million shares outstanding
The following transaction occurred in 2009:
Mar 1 = Matrix purchased 24 million shares of common stock as Treasury Stock treasury stock
July 1 = Matrix issued a 5% common stock dividend
Oct 1 = 4 million treasury shares were sold.
Net income for 2009 was $150 million.
Calculate Basic EPS
* Considers the dilution of earnings that arises from potential common shareholders.
* Potential Common Shares:
* Options and warrants
* Convertible bonds
* Convertible preferred stock
Options and Warrants
* Calculate EPS as if all (“in-the-money”) shares associated with options, rights, and warrants have been exercised.
* We assume the options were exercised at the beginning of the year or when the options were issued if later.
* Options have a denominator impact only.
* Treasury stock method: assumes that hypothetical proceeds from the exercise of options are used to purchase treasury shares at the average market price for the period.
* This method usually results in a net increase in shares included in the denominator of the calculation of diluted EPS because the market price is generally higher than the exercise price of the options.
1. Determine new shares from the hypothetical exercise of all options.
2. Determine the cash proceeds from hypothetical option exercises (# of options x strike price).
3. Determine the number of shares that would be reacquired using the cash proceeds from the hypothetical option exercises (cash proceeds / average market price).
4. Increase the diluted EPS denominator by the difference between the total number of shares from hypothetical exercises and the number of shares from hypothetical repurchases.
Exercise 2: Carbondale Enterprises reported the following:
* 200,000 shares of common stock issued and outstanding at December 31, 2013.
* On July 1, 2014, Carbondale issued a 10 percent stock dividend.
* Unexercised stock options to purchase 40,000 shares of common stock (adjusted for the 2014 stock dividend) at $20 per share were outstanding at the beginning and end of 2014. The market price of Carbondale's common stock (adjusted for the stock dividend) was $25 per share during 2014.
* Net income for the year ended December 31, 2014, was $1,100,000.
* Calculate Diluted EPS
* Convertible preferred stock and convertible debt
* Calculate EPS as if all convertible securities (debt or equity) were converted into shares of common stock.
* We assume the...