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Earnings per Share - PowerPoint PPT Presentation


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Earnings per Share. Earnings per Share. Financial statement users use earnings per share (EPS) to judge a company’s performance and to compare it with performance of other companies Shown on the income statement Shown for income from continuing operations Income before extraordinary items

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earnings per share2
Earnings per Share
  • Financial statement users use earnings per share (EPS) to judge a company’s performance and to compare it with performance of other companies
  • Shown on the income statement
    • Shown for income from continuing operations
    • Income before extraordinary items
    • Cumulative effect of accounting change
    • Net income
slide3
2000

Earnings per share (basic)

Income before extraordinary

loss and cumulative effect

of accounting change $4.69

Extraordinary loss -0-

Cumulative effect of accounting

change (.19)

Net income $4.50

basic eps
Basic EPS
  • Net income / weighted average of common shares outstanding
  • Example:

EPS = $334,500/117,500 shares = $2.85

Weighted average:

100,000 shares x 3/12 = 25,000

120,000 shares x 6/12 60,000

130,000 shares x 3/12 32,500

117,500

capital structures
Capital structures
  • Simple capital structure
    • No convertible bonds, stocks, or stock options
  • Complex capital structure
    • Convertible bonds, stocks, stock options (Potentially dilutive securities)
    • Potential dilution or possibility of conversion of these instruments creating more shares of stocks and diluting the EPS per stock
      • Diluted EPS – calculated by adding all potentially diluted instruments to the number of shares
retained earnings
Retained Earnings

RE = Profits – Losses – dividends – transfers to contributed capital

Restrictions on RE:

Contractual - may restrict an amount that can be paid out for dividends

State law – may not allow payment of dividends if reduces the equity level

Board of Directors – may want an x amount in for future needs

slide7

Small Stock Dividend (less than 20-25% of a company’s oustanding stock) 30,000 x .10 = 3,0003,000 x $20 Market Price = $60,000 - $15,000 = $45,000 3,000 x $5 par value = 15,000

BeforeAfter

Stockholders’ Equity:

Common stock, $5 par,

30,000 shares issued $ 150,000 $150,000

Common stock distributable

3,000 shares 15,000

Additional paid-in cap. 30,000 75,000

Retained earnings 900,000 840,000

Total $1,080,000 $1,080.000

Total S/E is unchanged

large stock dividend example
Large Stock Dividend Example

Stockholders’ Equity:

Common stock, $10 par,

10,000 shares $ 50,000 $100,000

Additional paid-in cap. 30,000 30,000

Retained earnings 70,00020,000

Total $ 150,000 $150,000

BeforeAfter

+

-

Dividend deducted from retained earnings and recorded in the Common Stock account at par. Additional Paid-In Capital account is unaffected.

stock splits

Certificate of Stock

Certificate of Stock

$3 par value

Certificate of Stock

Certificate of Stock

$1 par value

Stock Splits
  • Results in additional issuance of shares
  • Reduces par value per share
  • No change in Stockholders’ Equity accounts
stock splits10

Disclose

in notes

Stock Splits
  • Not recorded in accounts
  • Splits reduce market value per share and make stock more affordable to a wider range of investors
2 for 1 stock split example
2-for-1 Stock Split Example

Stockholders’ Equity:

Common stock, $10 par,

5,000 shares$ 50,000

Additional paid-in cap. 30,000

Retained earnings 70,000

Total $ 150,000

Before

Split

Assume Shah Company declares 2-for-1 stock split.

2 for 1 stock split example12

Only disclosures are affected

All accounts are unchanged

2-for-1 Stock Split Example

Stockholders’ Equity:

Common stock, $5.00 par,

10,000 shares$ 50,000 $ 50,000

Additional paid-in cap. 30,000 30,000

Retained earnings 70,000 70,000

Total $ 150,000 $150,000

BeforeAfter