Question

: basic and diluted EPS. Basic E On a firm's income statement, you likely will see two entries for earnings per share (EPS): basic and diluted EPS. Basic EPS is the firm's net income available to shareholders divided by the number of shares of common stock. However, while common shares are definite claims of an owner's equity, unexercised stock options, convertible debt and preferred stock, and warrants represent potential claims on an owner's equity. If they are exercised or converted, the number of common shares may increase. The hang is the percentage difference between the number of shares and the potential number of shares. The diluted EPS is the net income available to common shareholders divided by the number of common shares if all options, convertibles, and warrants are exercised or converted. Check Your Understanding A firm is reporting net income available to common shareholders of $21.25 million. The firm has 45 milion common shares outstanding and has no convertible preferred stock or debt. However, if all stock options and warrants were exercised, the firm would have 50 million common shares. Basic EPS= $0.47 per share ▼ Diluted EPS

Answer 1

Solution : Basic EPS calculation does not consider the calculation the effect of any dilutive securities.

Basic EPS =           Net Income - Preferred Dividend              Weighted average number of common shares outstanding        = $21.25/$45        = $0.47 per share

Dilutive Securities are stock option, warrant, convertible debt or convertible preferred stock that decrease EPS, if exercised to common stock.

Diluted EPS =           Adjusted income available for common shares Weighted average number of common and potential common shares outstanding        = $21.25/$50        = $0.425 per share