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Unformatted text preview: 16-1Bob Anderson, UCSB 2004DILUTIVE SECURITIES AND EARNINGS PER SHAREChapter1616-2Bob Anderson, 2004136A REFRESHEREPS =Earnings* Weighted Average Shares Outstanding* Less any preferred dividendsSo if a Company has net income of $100,000 and their weighted average shares outstanding are 1,000, then their EPS is $100.16-3Bob Anderson, 2004EPS: IMPORTANCEWho would likely be a user of EPS data?ShareholderWhy?Because a shareholder does not own 100% of the Company, consequently 100% of the earnings is not as meaningful as the performance relative to their investment.If you purchase stock of a company for $10/ share and it has net income of $10,000,000, does that seem like a good investment?Who knows- you would need to know how many shares are outstanding- in other words you would want to know what the EPS is.So if you purchased the shares for $10 and EPS for the year was $5- how would you like that? What if it was $.10 per share?16-4Bob Anderson, 2004NEW TERM: DILUTIVEDilutivemeans the ability to influence the EPS in a downward direction--i.e., the inclusion of the dilutive security in the calculation decreases the resultant EPS figure.For instance: options outstanding that could be converted to common stock. If you think of them as common stock, then they would increase the denominator of an EPS computation while the net income would be the same, therefore they would have a dilutive or decreasing impact on EPS if you consider them stock.Another new term: In the money:If an option grants the holder the right to purchase common stock for $10/ share and the market value is $15/ share, then they are in the money- meaning that because the exercise price is less than the market value, they have non-subjective value today.16-5Bob Anderson, 2004Earnings Per Share (EPS)APB #15; FASB # 128Simple Structure--Only common stock; no potentially dilutive securities are present in the capital structure.Complex Structure--Potentially dilutive securities are present within the capital structure.Required for public companies, NOT required for non-public companies.When required (public company) present on the face of the income statement. MINIMUM: FOR NET INCOME, SHARES USED FOR EPS AND DILUTED EPSEarnings per Share (EPS)16-6Bob Anderson, 2004Required EPS figures--EPS calculations must be performed for each of these figures:Income from continuing operations$312,000*+/- G/L Disposal of a Segment (36,000)*Net income before extraordinary items, etc.276,000*+/- Extraordinary items(45,000)Net income$171,000*Earnings per Share (EPS)*Required EPS for these figures. The other figures are normally derived so the reader may reconcile the numbers. (Disclosure)16-7Bob Anderson, 2004Income from continuing operations before taxes520,000$ Income tax208,000Income from continuing operations312,000Discontinued operations :Income from operations , less $24,800 tax54,000Loss on disposal, less $41,000 tax(90,000)Total discontinued operations(36,000)Income before extraordinary item and cumulative...
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- Fall '08