Diluted EPS Example

[keep_running]

• 6.125% convertible bonds, convertible into 33 shares of common stock. Issue price $1,000, 100 bonds outstanding.
• 6.25% convertible preferred stock, $100 par, 2,315 shares outstanding. Convertible into 3.3 shares of common stock, Issue price $100.
• 8% convertible preferred stock, $100 par, 2,572 shares outstanding. Convertible into 5 common shares, Issue price $80.
• 9,986 warrants are outstanding with an exercise price of $38. Each warrant is convertible into 1 share of common. Average market price of common is $52.00 per share.
• Common shares outstanding at the beginning of the year were 40,045.
• Net Income for the period was $200,000, while the tax rate was 40%.

Diluted EPS:
(100 bonds)(33 common shares/bond) = 3,300 common shares
(2,315 preferred shares)(3.3) = 7,640
(2,572 preferred shares)(5) = 12,860
7,640 + 12,860 = 20,500 common shares from preferred
[($200,000 − $35,045) + $35,045 + $3,675] / (40,045 + 3,300 + 20,500 + 2,689)
= $203,675 / 66,534 shares = $3.06
I am confused on where they computed the 2,689 shares in the denominator.

 

[S2000magician]

It’s the net number of shares issued for the warrants, using the treasury stock method.
9,986 shares issued × $38 = $379,468
$379,468 ÷ $52 = 7,297 shares repurchased
9,986 shares issued − 7,297 shares repurchased = 2,689 net shares issued

 

[mustafa.khokhawala]

8% convertible preferred stocks (3rd pointer) issue price USD 80, is just for distraction and does not get used anywhere in determing eps. pls correct me if I am wrong.

 

[Paridhi Vaid]

Can someone please run through this example for me? I am having trouble understanding the Diluted EPS calculations. I’d appreciate any help.

 

[S2000magician]

Paridhi Vaid wrote:Can someone please run through this example for me? I am having trouble understanding the Diluted EPS calculations. I’d appreciate any help.

I wrote an article that may be of some help: http://financialexamhelp123.com/earnings-per-share-eps/