- Income Statement
- Formats of Income Statements
- Principles of Revenue Recognition
- Revenue Recognition - Long-term Contracts
- Revenue Recognition - Instalment Sales
- Revenue Recognition - Barter Transactions
- Expense Recognition
- Inventory Expense Recognition
- Depreciation Expense Recognition
- Amortization Expense Recognition
- Bad Debt Expense and Warranty Expense Recognition
- Financial Reporting of Non-recurring Items
- Operating and Non-operating Components of Income Statement
- How to Calculate Basic Earnings Per Share (EPS)
- Impact of Stock Dividends and Stock Splits on Earnings Per Share (EPS)
- Diluted EPS
- Calculation of Diluted EPS (Convertible Preferred Stock)
- Calculation of Diluted EPS (Convertible Debt)
- Common Size Income Statement
- Performance Measures of a Company
- Comprehensive Income
Calculation of Diluted EPS (Convertible Preferred Stock)
We have the following data for a company:
- Net income= $12,000
- Preferred dividend= $2,000
- Weighted Average Shares Outstanding= 10,000
- Convertible Preferred Stock Outstanding = 1,000
Case A: Each share of preferred stock is to be converted into four shares of common stock
Basic EPS = (12,000 – 2,000)/10,000 = 1
The convertible preferred stock should be included in the calculation of diluted EPS only if it is dilutive. To check if it is dilutive, we will divide the preferred dividend by the no. of common shares created from the preferred stock. If this is less that basic EPS, the security is dilutive.
In this example: $2,000/4,000 = 0.5 which is less than basic EPS of 1. Therefore the convertible preferred stock is dilutive and must be included in the calculation of diluted EPS.
Diluted EPS = 12,000/(10,000+4,000) = $0.857
Note that in the numerator we did not subtract the preferred dividend as the preferred stock is assumed to be converted into common stock.
Case B: Each share of preferred stock is to be converted into one shares of common stock
Impact of the assumed conversion: $2,000/1,000 shares = $2 > Basic EPS
This security is anti-dilutive and should NOT be considered in the computation of DEPS.
The generalized formula for diluted EPS is presented below:
Unlock full access to Finance Train and see the entire library of member-only content and resources.