Earnings Per Share

) / Wtd Avg Sh Outstanding

Diluted EPS= Income Applicable to Common Stock +   Interest Expense (net of tax) on convertible debt +   Dividends on convertible             preferred stock
Weighted average shares outstanding assuming dilution from all dilutive securities
For treas stock purchased:     (add under line # to denominator above)
New shares from assumed exercise
Less: Treasury shares assumed purchased
Net increase in shares outstanding
Num: Basic EPS Num + The interest on the convertible debt would be added back:   $2,000,000 X .08 X (1 – .40)
Denom: Denom of basic EPS + :
 Simple formula = (MP-OP)/MP x #options= incremental shares
The shares issued upon conversion of the bonds are added to the denominator:   ($2,000,000 total value of bonds ÷ $1,000 face value per bond) X 40 shares/bond
Dilution Test for Convertible Preferred Stock
Numerator effect = Preferred dividends = $180,000
Denominator effect = shares issued upon conversion = $3,000,000 total par value of preferred stock ÷ $100 par value per share (to get number of preferred shares) * 3 (shares of common for each share of preferred) = 90,000 shares of common

Dilution Test = $180,000/90,000 shares = $2.00 per share
Since $2 > $1.70 (Basic EPS), the convertible preferred is anti-dilutive

Dilution Test for Convertible Bonds
Numerator effect = interest savings net of taxes = $96,000
Denominator effect = shares issued upon conversion = 80,000 shares

Dilution Test = $96,000/80,000 = $1.20 per share
Since $1.20 > $1.70 (Basic EPS), the convertible bonds are dilutive.
Stock options are dilutive as long as the average market price for the year is greater than the exercise price of the option (i.e., as long as MP>OP [continues]

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