Objective of earnings per share information u Present
Objective of earnings per share information u Present earnings per share possibilities u No potential dilution u Maximum dilution u Anti dilutive effect on earnings is not considered (i. e. share repurchases) EPS 1
Two measures of earnings per share u Basic earnings per share – no potential dilution u Diluted earnings per share – maximum dilution EPS 2
Basic earnings per share model adjusted Basic net EPS = income (ANI) EPS weighted average number of shares outstanding during the period (S) 3
Adjusted net income u Net income from continuing operations u Reduced by preferred stock dividends which have been declared or are cumulative EPS 4
Weighted average number of common shares u Stock splits/dividends during the period – require restatement of weighted average u Stock splits/dividends subsequent to end of period but prior to issuance of financial statements – require restatement of weighted average u Includes contingently issueable shares if the necessary conditions have been satisfied EPS 5
Diluted earnings per share model Dilut ed EPS = adjusted net income (ANI) + income adjustm ent weighted average number of shares outstanding during the period (S) + share adjustment 6
Call options and warrants u “Treasury stock method” u Capture potential dilution Share Adjust ment (SA) EPS exerci total shares se obtainable procee = upon – ds avg market exercise of price of security shares 7
Call options and warrants computational guidelines u Quarterly averaging technique – if the reporting period is greater that 3 months, a quarterly averaging technique is employed u Which exercise price – use the exercise prices of the options that are “in-the-money”. EPS 8
Option computation 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 9
Option computation The treasury stock method calculated the “net” number of shares that need to be issued AFTER the proceeds from the exercise are used to repurchase shares in the open market at market prices. SA: 3, 091 3 quarters = 1, 030 shares EPS 10
Stock-based compensation arrangements u Considered the same as options u Outstanding at the grant date u If dilutive, shares should be included in calculation of DEPS regardless of employees’ rights to the shares u Proceeds consist of: ¬ cash which must be paid at exercise unrecognized compensation cost ® the tax benefit on tax versus book difference EPS 11
Contingently issued shares Based on: u Passage of time along with other conditions u Maintenance of some level of earnings u Attainment of some level of earnings u Changes in market price of shares u Occurrence of events unrelated to earnings or market price EPS 12
Contingently issued shares: Conditions satisfied u 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 u 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 13
shares: Conditions not yet satisfied u Treatment in BEPS – exclude from the calculation u 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 14
Convertible securities u Types – convertible bonds – convertible preferred stock u “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 15
If converted method: Convertible bonds Example: – 1, 000 8% $100 bonds issued on 4/1/2001 – 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 16
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 amort 7, 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 17
If converted method: Convertible preferred stock u Dividends are a distribution of income, not a component of income – income adjustment does not require a tax effect u No amortization of premium or discount EPS 18
Convertible securities: Special issues u Variable conversion rates – always use the conversion rate most favorable to the holder u Earnings per incremental share – evaluate the potential dilutive effect by considering securities in the order of increasing incremental impact (IA SA) EPS 19
Presentation of EPS information u In comparative financial statements, if DEPS is shown for one period, it should be shown for all periods u Requirements for interim are the same as annual requirements EPS 20
Presentation of EPS Information (con’t) u 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 21
Special disclosure requirements u Reconcile the numerator and denominator used to calculate BEPS to those used for DEPS u Preferred dividends effect in arriving at income available to common stockholders for the BEPS calculation u Securities not included in DEPS, because their effect was antidilutive, which could effect BEPS in the future EPS 22
Disclosure of information about capital structure u 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 u Entities must disclose number of shares issued during the past fiscal year or any subsequent interim periods EPS 23
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