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FRA
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2. Earning Per Share
Earning
Per Share
(EPS)
Basic Diluted
EPS EPS
It is the most commonly used It measures the quality of a
corporate profitability company’s earning per share
performance measures for (EPS) if all dilutive convertible
publicly-traded firms. securities were exercised.
convertible convertible
net income - preferred    
    preferred    debt  1  tax 
 dividends 
 dividends   interest 
Net Income - Preferred Dividends
Diluted EPS     
Basic EPS 
Weighted Average Number of Shares Outstanding  weighted   shares from   shares from   shares 
 average    conversion of   conversion of   issuable from
       
 shares  conv. pfd.shares   conv. debt  stock options
       
Calculated through
Treasury Stock Method
(TSM)
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3. TSM Operation
Option Shares Fund Used to Purchase Co’s
Exercised Created Received share @ Avg.
Market Price
Net Increase in
Outstanding
shares
Net Issuance= Shares Created - Share
purchased
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4. Concept Checker
2009
Net Income $120.5mn
Weighted no. of common 85mn
shares outstanding (entire
year)
No. of Preference share 10,000
outstanding
Face value @ preferred $1000
shares
Dividend @ preferred shares 8%
Suppose R&M has 100,000 stock options outstanding at the end of the year, convertible
into 100 normal equity shares per option at the strike price of $ 25. If average market
price of the stock for the entire year 2009 was $ 50, the basic & diluted EPS for 2009 is
A. $1.41 & $1.33
B. $1.35 & $1.44
C. $1.41 & $1.30
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5. Answer
 Preferred Dividend = 10,000 * 1000 * 8% = $0.8mn
 Basic EPS = (120.5 – 0.8)mn/85mn = $1.41
Diluted EPS
New equity shares 100000*100 10mn
created
Fund Received 10mn * $25 $250mn
Repurchase of $250mn/$50mn 5mn
shares shares
Net shares Issued 10mn – 5mn 5mn
Total Outstanding 85mn+5mn 90mn
shares after
dilution
Diluted EPS ($120.5 –$ $1.33
0.8)mn/90mn
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