Exercise #2: Access the glossary (\"Master Glossary\") to answer the following:
ID: 2593014 • Letter: E
Question
Exercise #2:
Access the glossary ("Master Glossary") to answer the following:
1. What is the definition of "basic earnings per share"?
2. What is "dilution"?
3. What is a "warrant"?
4. What is a "grant date"?
For how many periods must a company present EPS data?
For each period that an income statement is presented, what must a company disclose about its EPS?
If a company's outstanding shares are increased through a stock dividend or a stock split, how would that alter the presentation of its EPS data?
Explanation / Answer
Basic earnings per share:
Basic earnings per share is a rough measurement of the amount of a company's profit that can be allocated to one share of its stock. Basic earnings per share (EPS) do not factor in the dilutive effects of convertible securities.
Basic EPS is calculated as follows:
Basic EPS = (net income – preferred dividends) / weighted average number of common shares outstanding
Dilution:
Dilution is a reduction in the ownership percentage of a share of stock caused by the issuance of new shares. Dilution can also occur when holders of stock options, such as company employees, or holders of other optionable securities exercise their options.
When the number of shares outstanding increases, each existing stockholder owns a smaller, or diluted, percentage of the company, making each share less valuable.
Warrant:
A warrant is a derivative that confers the right, but not the obligation, to buy or sell a security – normally an equity – at a certain price before expiration.
An American warrant can be exercised at any time on or before the expiration date, while European warrants can only be exercised on the expiration date. Warrants that confer the right to buy a security are known as call warrants; those that confer the right to sell are known as put warrants.
Grant date:
The grant date is usually the first day of the offering period. This is sometimes called the enrollment date.
How many periods must a company present EPS data:
It should present basic EPS for all periods for which income statements or summaries of earnings are presented.
For each period an income statement is presented the following must be disclosed:
1.A reconciliation of the numerators and the denominators of the basic and diluted per-share computations for income from continuing operations. The reconciliation must display income and share amount that effects securities that affect earnings per share.
2.The effect that has been given to preferred dividends in arriving at income available to common stock holders in computing basic EPS
3.Securities that could potentially dilute basic EPS in the future that were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the period presented.
Restatement if stock split or stock dividend:
If the number of equity or potential equity shares outstanding increases as a result of a bonus issue or share split or decreases as a result of a reverse share split (consolidation of shares), the calculation of basic and diluted earnings per share should be adjusted for all the periods presented. If these changes occur after the balance sheet date but before the date on which the financial statements are approved by the board of directors, the per share calculations for those financial statements and any prior period financial statements presented should be based on the new number of shares. When per share calculations reflect such changes in the number of shares, that fact should be disclosed.
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