Chap 16 - EPS

Conversion is on a what if method conversion what

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Unformatted text preview: resents structures assuming all dilutive dilutive instruments are converted. • Conversion is on a “What if” Method: Conversion “What – Options, Warrants, and Rights: use the Options, Treasury Stock Method. Treasury – Convertible Securities: use the “IfConvertible “Ifconverted” Method. Treasury Stock Method Treasury • Proceeds from conversion are assumed to Proceeds be used for purchase of treasury stock at current market price. current • Treasury stock is assumed to be reissued Treasury to option or warrant holders. to • Any additional shares issued, over treasury Any stock, are added to Weighted Average Shares Outstanding. Shares • Exercise is assumed to occur on the first day Exercise of the year unless issue date is later. of Treasury Stock Method-Treasury Example: Basic Data Assume the following: • Net Income $8,000 • Common Shares Outstanding (entire year) 6,000 • 10% Bonds Payable $20,000 • 1-for-1 Options Outstanding 2,000 • Exercise Price Per Share on Options $30 • Average Price of Common Shares $40 • Income Tax Rate 40% Treasury Stock Method-Treasury Example: Basic Earnings Per Example: Share Share Basic EPS = Net Income-Preferred Dividend Weighted Average Common Weighted Shares Outstanding Shares $8,000 Basic EPS = 6,000 = $1.33 Treasury Stock Method-Treasury Example: Option Proceeds Options Assumed Exercised Shares Assumed Repurchased With Proceeds* ($60,000 / $40) Additional Shares Assumed Issued Amount of Proceeds (2,000 X $30) Amount * 2,000 1,500 1,500 500 $ 60,000 60,000 Treasury Stock Method-Treasury Example: Number of Shares Actual Shares Outstanding Incremental Shares: Issued Assuming Exercise Repurchased From Proceeds Total Shares Assumed Issued 6,000 2,000 1,500 500 6,500 Treasury Stock Method-Treasury Example: Diluted Earnings Per Exampl...
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