All about EPS

  1. When we have all types of dividends for the period, i.e. common stock div ($300), preferred stock div (nonconvertible, $200), convertible preferred stock div ($100), What should be the numerator for basic and diluted eps? I am not sure whether convertible preferred div should be included in both basic and diluted calculations. Basic --> Net income - 200 -100 or just NI- 200 ? Diluted --> NI- 200 - 100 +100, or should be NI - 200 + 100 ? 2. When we have both convertible debt and convertible preferred stock, to get diluted eps, should we calculate seperately or jointly, i.e. diluted eps for convertible debt and diluted eps for convertible preferred stock? And then use the smaller eps as the diluted eps for the whole company and compare with basic eps. Alternatively, just get the combined diluted eps. P.S. seperatel method is what I see from a stalla practice question. 3. If we are told the specific issue date of convertibles, should we apply weight average to get the number of if-converted shares and weight average amount of preferred dividends for diluted eps? This is what CPK123 suggested, but is not supported by CFA book (page 174 says to treat them as if converted at the beginning of the period)

You gotta get a handle on the concept, not the mechanics. 1. The numerator is money available for common shareholder. The denominator is wtd common shares. For Basic EPS, are the shares of the convertible PS included in the denominator? If you think about the answer to that then the answer to your question becomes obvious. 2. The objective of diluted EPS is to get the lowest, most conservative number. To see if convertibles are dilutive, for each item on a stand alone basis take the ratio of the amount you would adjust the numerator over the amt you would adjust the denom. For example, if you paid $40 in PS dividends, and 200 new shares, that ratio is $0.20 If that number is below current EPS it is dilutive. Do that for each item. At that point you might need to play with numbers. If current EPS is $1.50, the PS is 0.20 and convert bonds is, say, !.45, you might find that adding in the ps alone brings it down below the bond ($1.45) amount, so you don’t add those in. It’s a bit of an art. Do some practice problems. 3. Don’t know off the top of my head, but since the whole concept of diluted EPS is a concept, not based on actual dilution that occured, I can see a full year assumption.

I did not talk about the Conversion aspect in my post. What I was talking about was to be careful about how much you deducted as Preferred Dividend on the Numerator. E.g. If the Company was talking about the whole year with relation to the common stock, but had issued their preferred shares on Jul 1 of the Year – and you went ahead and deducted the Preferred dividend for the whole year, while doing your basic / diluted EPS calculations – you would end up with the wrong answer. And also, given the mechanics of the exam – you would definitely find that “wrong” answer as one of the choices. CP

Reading 32 makes no reference to preferred convertible as of a certain date and not before that date during the year. The example you cite on page 174 is not restricting the convertibility of the preferred stock (preferred is considered convertible at the beginning of the period). CPK is right, if the preferred is convertible only starting at a certain date during the year or operating cycle, than for the period before that date you need to pay the preferred, so the add back at the numerator would be the portion of preferred dividends that end up not being paid as result of converting. The WASO in the denominator would be calculated taking into account the period remaining under the year when converting preferred to common.