Hi! I know this is basic but can someone give me a clear picture of, and a very good example for why Antidilutive securities increase EPS?
Thank you!
Hi! I know this is basic but can someone give me a clear picture of, and a very good example for why Antidilutive securities increase EPS?
Thank you!
They don’t…
Antidilutive securities result in Diluted EPS being greater than Basic EPS. In such a case, Diluted EPS is then reported as Basic EPS. As an example, assuming net income is $1,000,000 with 500,000 common shares outstanding, and 10,000 shares of convertible preferred (convertible into 5 common and paying $10 div) outstanding, basic and diluted EPS are as follows:
In this Basic EPS calc we need to remove the convertible preferred dividends from net income as this is not available to common shareholders: Basic EPS = (1,000,000 - (10,000 * 10)) / 500,000 = $1.80
In this Diluted EPS calc, we assume the convertible preferred are converted, meaning no dividends are paid, and instead we need to add the newly created common shares to the denominator: Diluted EPS = 1,000,000 / (500,000 + (5 * 10,000) = $1.82
Diluted EPS > Basic EPS, therefore the convertible preferred are antidiluted, and Diluted EPS would be reported as $1.80.