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Basic & Diluted EPS

Basic EPS calculation does not consider effects of any dilutive securities:

Basic EPS = (Net income – Preferred dividends) / Wtd. Avg. No. of Common Shares Outstanding
 
​Diluted EPS 

Diluted EPS = Available income for common shareholders / (Wtd. Avg. Common shares plus potential common shares outstanding)

Therefore, diluted EPS = [(Net Income – PFD Div) + (Convertible preferred Dividends) + (Convertible Debt Interest) * (1–t) ] / [Wtd. Avg. Sh's + Shares from conversion of conv. pfd. shares + Shares from conversion of conv. debt + Shares issuable due to stock option]

Question:

Reported net income of $555,600 and 150,000 shares of common stock outstanding for the entire year. 10,000 shares of 6%, $100par, preferred stock outstanding during 2006. During 2005, issued 1000, $1,000 par, 9% of bonds for $1,000,000 (issued at par), convertible to 100 shares of common stock. The tax rate is 40%. Compute the 2006 basic and diluted EPS.

Ans:

Basic EPS = (555,600 – 60,000) / 150,000 = $3.31

Diluted EPS = (555,600 – 60,000 + 1,000 * 1,000 * 9% (1–0.4)) /

(150,000 + 100,000) = $2.20




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