earnings per share. eps2 importance of earnings per share information uhistorical performance of a...
TRANSCRIPT
$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