# Diluted EPS question, #5 for Stalla

Net Income: 5 million Two preferred stock outstanding: 150,000 shares @ 5% convertible preferred stock with a par value of \$100 per share and convertible into 6 shares of common stock 100,000 shares @ 7% preferred stock, par \$100. WACSO=3,000,000 Basic=1.18 They have diluted 3,550,000+750,000/3,900,000=\$1.10 I understand everything except for how the got to the numerator. Can someone please explain? Thanks in advance

NI-Preferred Dividends1-Preferred dividends2+Preferred dividends 1 (added back following conversion)

the 7% preferred stock are not convertible, so you only subtract the \$700,000 of interest payments from NI, but don’t get to add it back, as you do with the \$750,000 interest payments on the 5% convertible preferred stock. So it is: 5,000,000 - 750,000 - 700,000 + 750,000

Thank you for the explanation Jamms! I didn’t understand why you added back the \$750k.

Net Income: 5 million Two preferred stock outstanding: 150,000 shares @ 5% convertible preferred stock with a par value of \$100 per share and convertible into 6 shares of common stock 100,000 shares @ 7% preferred stock, par \$100. WACSO=3,000,000 Basic=1.18 5000000 is NI 150000*100*.05 = 750,000 is Convertible Preferred Stock Dividend 100000*100*.07 = 700000 is Non-Convertible Pref Stock Dividend So Basic EPS: (5000000-750000-700000 ) / 3000000 = 1.18 When potential Dilution occurs… 750000 of Conv. Pref. Stock Dividend would not be paid, so gets added back to the numerator. So Diluted EPS: (5000000 - 700000) / ( 3000000+150000*6) = 4300/3900 = 1.10

diluted eps is rather ‘contingent’ eps, like in a “if” scenario “if” the preferred stock got converted to common … there would be no preferred stock to pay the preferred dividend to! so you save on that ‘expense’ & more money gets added to your net income… (although now you got more common stock too, resulting in a truly ‘diluted’ eps)