When asked to calculate basic or diluted EPS, preferred dividends are subtracted from net income in the numerator. Here is my question, when a question states… A). XYZ Has 10K 10% $100 Par Preferred Shares B). XYZ Has 10K 10% $100 Par Preferred Shares and declared a dividend of $100K C). XYZ Has 10K 10% $100 Par Preferred Shares and paid preferred dividends of $100K Assume $100K in Preferred dividends were paid and subtract from net income only in examples (A &C) or just example ©. Just because dividends were declared, does not mean that they were paid. Right??
Right, but take the declared preferred away anyway.
You always substract them from the EPS
so the rule is: 1. Any preferred dividend amount --> does not have to be paid and all forms (i.e. preferred, preferred convertible) is deducted from NI on the numerator to calculate the Basic EPS. 2. For Diluted EPS --> Add back any Convertible preferred divided paid out in Step 1 above to the numerator. Add converted shares (as though they were converted) to the denominator. calculate diluted EPS. If diluted EPS < Basic EPS --> that is your answer. Else Basic EPS is your answer. CP
Thank you for clearing this up