EPS and Compensation

Good Essays
EPS and Compensation

Only applies to common shares

The Issue
EPS is a measure of income earned for each share of common stock
EPS = NI – preferred dividends (declared and THIS YEARS cumulative but not declared) Weighted average number of shares
EPS with a stock dividend = NI – preferred dividends Shares outstanding * split ratio (or 1 + stock dividend %)
Example
This year we earned $100,000 and have 50,000 shares of common stock outstanding throughout the year
EPS = 100,000/50000 = $2 / share

In addition to the above information, we find that instead of cash, we gave our CFO options to receive 25,000 shares for free in two years as compensation. What is this year’s EPS?

EPS = 100,000/(50,000 + 25,000) = $1.33 / share

Earnings per Share
Basic earnings per share
EPS considering only common stock outstanding at some point during the year
Diluted earnings per share
EPS considering potentially dilutive securities in addition to common stock outstanding during the year
Examples of potentially dilutive securities
Convertible bonds
Convertible preferred stock
Stock warrants (options)
Stock compensation
Accounting for convertibles
Issuance  same as straight debt or equity
Retirement  same as straight debt or equity
Conversion  Book value approach
What is the book value of the convertible security?
Bond = face value + unamortized premium (or – unamortized discount)
Preferred stock = par value + additional paid in capital
Transfer the book value of the convertible to common stock (par and APIC)
Stock Warrants
Only detachable warrants have their own value
Use proportional or incremental method to apportion selling price
Proportional: have market price for all securities in the package
Incremental: missing a market price
Initially, credit goes to APIC – stock warrant

Upon exercise
Dr. Cash
Dr. APIC – stock warrant Cr. Common Stock Cr.

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