2 Earnings per ShareFinancial statement users use earnings per share (EPS) to judge a company’s performance and to compare it with performance of other companiesShown on the income statementShown for income from continuing operationsIncome before extraordinary itemsCumulative effect of accounting changeNet income
3 2000 Earnings per share (basic) Income before extraordinary loss and cumulative effectof accounting change $4.69Extraordinary lossCumulative effect of accountingchange (.19)Net income $4.50
4 Basic EPS Net income / weighted average of common shares outstanding Example:EPS = $334,500/117,500 shares = $2.85Weighted average:100,000 shares x 3/12 = ,000120,000 shares x 6/ ,000130,000 shares x 3/ ,500117,500
5 Capital structures Simple capital structure Complex capital structure No convertible bonds, stocks, or stock optionsComplex capital structureConvertible bonds, stocks, stock options (Potentially dilutive securities)Potential dilution or possibility of conversion of these instruments creating more shares of stocks and diluting the EPS per stockDiluted EPS – calculated by adding all potentially diluted instruments to the number of shares
6 Retained EarningsRE = Profits – Losses – dividends – transfers to contributed capitalRestrictions on RE:Contractual - may restrict an amount that can be paid out for dividendsState law – may not allow payment of dividends if reduces the equity levelBoard of Directors – may want an x amount in for future needs
7 Stockholders’ Equity: Common stock, $5 par, Small Stock Dividend (less than 20-25% of a company’s oustanding stock) 30,000 x .10 = 3,000 3,000 x $20 Market Price = $60,000 - $15,000 = $45,000 3,000 x $5 par value = 15,000Before AfterStockholders’ Equity:Common stock, $5 par,30,000 shares issued $ 150,000 $150,000Common stock distributable3,000 shares ,000Additional paid-in cap , ,000Retained earnings , ,000Total $1,080,000 $1,Total S/E is unchanged
8 Large Stock Dividend Example Stockholders’ Equity:Common stock, $10 par,10,000 shares $ 50,000 $100,000Additional paid-in cap , ,000Retained earnings , ,000Total $ 150,000 $150,000Before After+-Dividend deducted from retained earnings and recorded in the Common Stock account at par. Additional Paid-In Capital account is unaffected.
9 Stock Splits Results in additional issuance of shares Reduces par value per shareNo change in Stockholders’ Equity accountsCertificate of Stock$1 par valueCertificate of Stock$3 par value
10 Stock Splits Not recorded in accounts Splits reduce market value per share and make stock more affordable to a wider range of investorsDisclosein notes
11 2-for-1 Stock Split Example Stockholders’ Equity:Common stock, $10 par,5,000 shares $ 50,000Additional paid-in cap ,000Retained earnings ,000Total $ 150,000BeforeSplitAssume Shah Company declares 2-for-1 stock split.
12 2-for-1 Stock Split Example Stockholders’ Equity:Common stock, $5.00 par,10,000 shares $ 50,000 $ 50,000Additional paid-in cap , ,000Retained earnings , ,000Total $ 150,000 $150,000Before AfterOnly disclosures are affectedAll accounts are unchanged