# Basic and Dilutive EPS clarification?

Can someone just go over the exact calculations for this? And clarify when and how to include preferred shares and warrants with exercise at/in/out of the money. Thanks so much. I got rid of the Level 1 texts and I cannot find it in the level 2 texts.

it is in the books. i will post em tomorrow, but basically basic EPS is net inc - preferred div/shares outstanding diluted EPS accts for anything that could water down your equity ownership going forward. it includes convertible bonds, preferred stock, and in the \$ options.

Avoiding stating the equations, it’s like this: In calculating diluted EPS, For preferred: 1) Do not subtract preferred dividends from it. 2) Extra shares are number of preferred shares times conversion factor. 3) This procedure is only for convertible preferred. Normal preferred gets its dividended taken out as normal from NI, and no shares adjusment. For warrants and options: 1) Gets processed only if average market price for year is > exercise price of warrant. 2) Investors pay \$exercise price * number of warrants * common sharess/warrant. 3) Firm takes that money and buys shares from the market. 4) Any remaining shares needed are issued by comapny. So extra shares outstanding will be equal to total required shares - those that are bought, which is same as number of shares issued. For debt: 1) You save interest if debt is conoverted, which is number of bonds * full year interest after tax 2) Add interest to NI 3) Extra shares converted will add to outstanding shares. Other points: do a basic EPS first to make sure there is dilution. Make sure you do the eighted average shares calculation correctly, i.e., adjusting splits and stock dividends to beginning of period, etc.

also to add to dreary’s point about preferred shares, if the shares are convertible preferred, add the dividend to the numerator (in addition to subtracting the regular preferred dividends from net income). usually, these cancel out, but a company may sometimes have both non-convertible preferred shares and separate convertible preferred shares, each class of shares paying a different dividend amount…

…you know topher, I always add then subtract which looks silly but it keeps things in order!

ok so whats the clue here? if preferred shares are convertible, i add back the dividend to the numerator because the dividends are not paid out and i add the number of shares that can be converted to denominator?