Earnings per share is calculated by dividing the earnings available for distribution by total number of weighted average shares.
On the other hand, Diluted EPS takes into potential issue of shares. Each potential share issue has its own merits and viewed accordingly on individual basis.
Numerator (Basic EPS):
Net income = $850 million
Preferred dividends= 3mn * 9% * $ 100 = $ 27 million
since the preferred stock is cumulative, the dividend is deducted whether or not paid)
Denominator (Basic EPS): Weighted average Number of shares
common stock outstanding (1/1 – 12/31) |
520 million x (12/12) *1.05 |
546 million |
Treasury shares purchased (3/1 – 12/31) |
(24) million x (10/12) *1.05 |
(21) million |
Treasury shares sold (10/1 – 12/31) |
(4) million x (3/12) |
1 |
The weighted average number of shares |
526 million |
Basic EPS = ($850-27) ÷ 526 = $ 1.56
Now,
Stock Options
The stock options are dilutive because exercise price is lower than market price of $ 70 per share.
Using treasury stock method.
1. Exercise is assumed to take place at the later of the date of issue (9/13/21) or the beginning of the year (1/1/21). Assume exercise 1/1/21
2. The Treasury Stock Method assumes that the proceeds received upon exercise of $1,680 (30 million x $56) are used to buy back stock at the average market price, i.e., $1,680 ÷ $70 = 24 million
3. The net increase in the number of shares = 6 million (30 million issued upon exercise – 24 million repurchased)
Convertible Bonds
Using method if bonds are converted into common stock. Here is the step by step approach to calculate nature of dilution.
shares issued on conversion = 6 million
Interest paid, net of tax = $3 [(8% x $50) x 75%]
Interest per shares issued = 3/6 = $ 0.5 per share
EPS without assumed conversion = ($850 - $27+3) ÷ ( 526+ 6+6) = $1.54
The convertible bonds are dilutive because $1.54 is less than $1.56
Hence, diluted EPS = ($850 - $27+3) ÷ ( 526+ 6+6) = $1.54
Basic EPS =823/526 = 1.56
Diluted EPS = 826/538 = 1.54
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