What is Diluted earnings per share (EPS)?
In short
Diluted earnings per share (EPS) shows earnings per common share assuming all dilutive potential common shares, such as options, warrants and convertible securities, had been issued.
Key takeaways
- Options and warrants are included using the treasury stock method; convertibles using the if-converted method.
- Only securities that reduce EPS (dilutive) are included; antidilutive ones are left out.
- Public companies present basic and diluted EPS on the face of the income statement.
Example
10,000 options at $20 with an average share price of $25: proceeds of $200,000 buy back 8,000 shares, so 2,000 incremental shares are added.
Where it's tested
FAR: Equity & Earnings Per Share — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company has net income of $600,000 and paid $50,000 in dividends on cumulative preferred stock during the year, none of which were declared. What amount should be used as the numerator for basic EPS?