Acc 440 – Corporate Reporting
EPS
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.
Basic EPS
* Earnings available to common shareholders for each share of stock outstanding.
* Ignores any potential common shares which might arise from convertible securities.
* Calculation:
Net income (after tax) – Preferred dividends
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) = 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
Diluted 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.
* Steps:
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 Securities
* 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...
