# Basic EPS Net Income - Preferred Dividends Weighted Average Common Shares (WACS)

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Basic EPS Net Income - Preferred Dividends Weighted Average Common Shares (WACS)

Computation of WACS – Text Page 813 w Jan 1 - 90,000 shares outstanding w April 1 - issued 30,000 shares w July 1 - reacquired 39,000 shares w Nov 1 - issued 60,000 shares

Computation of WACS (authors’ approach) Fraction Shares of Year WACS Jan 1 -Apr 1 90,000 * 3/12 = 22,500 Apr 1- Jul 1 120,000 * 3/12 = 30,000 Jul 1- Nov 1 81,000 * 4/12 = 27,000 Nov 1-Dec 31 141,000 * 2/12 = 23,500 Weighted avg. common shares (WACS) 103,000

Computation of WACS (alternative approach) Shares Months Month Shares Jan 1–Apr 1 90,000 * 3 = 270,000 Apr 1-Jul 1 120,000 * 3 = 360,000 Jul 1-Nov 1 81,000 * 4 = 324,000 Nov 1-Dec 31 141,000 * 2 = 282,000 1,236,000  12 Weighted avg. common shares (WACS) = 103,000

Computation of WACS See E16-16 (part a) handout

DILUTION The reduction in EPS if securities that are potentially convertible or exercisable into common stock are converted or exercised

Stock Dividends and Splits u Require restatement of WACS before the stock dividend or split u Stock dividends or splits during the year are deemed to have been occurred at the beginning of the year u Stock dividends or splits after year-end but before issuance of the financials are likewise restated

Complex Capital Structures n Complex structures have convertible securities, options, warrants, or other rights whose conversion or exercise would reduce EPS n Only securities that reduce earnings per share (dilutive) are considered n Securities that increase earnings per share (antidilutive) are ignored

Measuring Dilutive Effect n Convertible securities: if-converted method n Options and warrants: treasury stock method

The If-Converted Method n The conversion of the securities into common stock is assumed to occur at the beginning of the year n The related interest effect (net of tax) is removed from net income n The weighted average number of shares is increased by the additional common shares assumed issued (at the beginning)

The Treasury Stock Method u Options and warrants (and their equivalents) are included in EPS computations u Options and warrants are assumed exercised at the beginning of the year u The proceeds from the exercise of options are assumed used to buy back common shares u The exercise price per share must be less than the market price per share for dilution to occur

Earnings per Share: Simple Capital Structures - Summary Single Presentation of EPS 1 Net Income less Preferred Dividends 2 Weighted Average Number of Common Shares Outstanding 3 EPS = Result in Step 2 Result in Step 3 4

Earnings per Share: Complex Structures - Summary Dual EPS Presentation Basic EPS Diluted EPS Dilutive Convertibles Dilutive Options and Warrants Dilutive Contingent Issues Net Income adjusted for interest (net of tax) and preferred dividends ------------------------------------------ Weighted average number of common shares assuming maximum dilution

Earnings per Share: Complex Structures - Continue with E16-16 handout

Earnings per Share: Complex Structures - See Appendix 16B

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