# diluted EPS

hi guys, hope all of you are having a blast preparing for the exam. just one question. when calculating dilutive EPS, whats the rule regarding stock splits, stock dividend? i couldnt find it in book three but definitely remember reading it somewhere. if someone can remind me where, i would realy appreciate it.

they have to be applied retrospectively… i.e. all prior stockdiv/split balances have to be adjusted. e.g. if you have a 50% stock divided (the same as a 3/2 stock split) you have to multiply all prior stock balances with 1.5 stock balances following the split dont have to be adjusted. however, this is the “general” procedure when calculating your weighted average shares outstanding and has nothing to do with diluted EPS. i dont have my books with me, so i cant point you to the exact location, sry.

Basic EPS has ‘weighted average number of common shares outstanding’ as its denominator Diluted EPS has ‘weighted average number of common shares outstanding’ plus ‘common shares issued upon assumed conversion/exercise of any potentially dilutive securities’ as its denominator. Also, if a potentially dilutive security is issued during the year, the ‘number of common shares issued upon their assumed conversion’ is also weighed for the fraction of the year that these securities were outstanding.

Great explanation! Once could not have said that in fewer words. beatthecfa Wrote: ------------------------------------------------------- > Basic EPS has ‘weighted average number of common > shares outstanding’ as its denominator > > Diluted EPS has ‘weighted average number of common > shares outstanding’ plus ‘common shares issued > upon assumed conversion/exercise of any > potentially dilutive securities’ as its > denominator. > > Also, if a potentially dilutive security is issued > during the year, the ‘number of common shares > issued upon their assumed conversion’ is also > weighed for the fraction of the year that these > securities were outstanding.

@beathecfa, maybe i remember incorrectly, but w.r.t. dilutive EPS aren’t we only supposed to adjust for securities that actually are dilutive? so, generally adjusting for all potentially dilutive securities might not always be correct. please correct me if i’m wrong, can’t check with my notes right now cheers

Chefe_ Great catch. I should’ve said ‘dilutive’ instead of ‘potentially dilutive’. Sorry about that, and thank you for correcting me.