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The earnings per share indicates how much the company is making money for single share. Basis EPS is computed by dividing total earnings by number of equity shares. Diluted EPS denotes the EPS when the shares are diluted that is the shares increase as a result of some corporate announcements.
Basic EPS:-
|
Porter's reported income |
251,000 |
|
Street's reported income |
206,000 |
|
Amortization expense |
(19,000) |
|
Consolidated net income (all to Porter) |
438,000 |
|
Porter shares outstanding |
73,000 |
|
Basic earnings per share ($438000 ÷ 73000) (a/b) |
$ 6 per share |
Diluted EPS:-
|
Street earnings after amortization ($206,000 - $19000) |
187,000 |
|
Shares outstanding |
34,000 |
|
Basic earnings per share ($187000 ÷ 34000) |
$ 5.5 per share |
|
Street's earnings assuming conversion of its bonds ($206,000 + $21000 interest saved net of tax) |
227,000 |
|
Street's shares assuming conversion of its bonds (34000 + 6000) |
40,000 |
|
Diluted earnings per share (227000 ÷ 40000) |
$ 5.675 |
Because diluted earnings per share is less than basic earnings per share, the convertible bonds are dilutive and should be included.
Porter’s share of Street’s diluted earnings:
Total shares assuming Street bond conversion 40000
Shares owned by Porter 34000
Porter's ownership percentage (34000 ÷ 40000) 85%
Street's earnings for diluted EPS (above) $227,000
Porter's ownership percentage of 85%
Earnings attributed to Porter company $ 192,950
Porter’s earnings and shares for diluted EPS:
Porter's separate income $251,000
Street’s income applicable to Porter (above) $192,950
Interest saved (net of tax) on assumed conversion of Porter's bonds 30000
Diluted earnings to Porter $473,950
Porter shares outstanding 73000
Additional shares from assumed bond conversion 5000
Diluted shares 78000
Consolidated income statement EPS amounts for Porter Company:
Basic earnings per share (above) = $6
Diluted earnings per share ($473,950 ÷ 78000) = $6.08
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