(amounts in millions, except per share amounts)
Basic EPS
net preferred
income dividends
shares
at Jan. 1
The incremental effect of the conversion of the preferred stock is:
preferred
dividends
conversion
of preferred
stock
The incremental effect of the conversion of the bonds is:
after-tax
interest savings
conversion
of bonds
Problem 19–14
Order of Entry:
We include in our calculation the convertible security with the lowest “incremental
effect” ($3.75) before the one with the higher effect ($4.00).
Problem 19–14 (concluded)
Diluted EPS (without conversion of bonds)
net preferred preferred
income dividends dividends
shares conversion
at Jan. 1 of preferred
stock
After including the conversion of the preferred stock only, EPS is $3.94. The
$4.00 incremental effect of the conversion of the bonds is higher than that amount,
so the second security is antidilutive. This is demonstrated by calculating EPS
again after including the conversion of the bonds:
Diluted EPS (with conversion of bonds)
net preferred preferred after-tax
income dividends dividends interest savings
shares conversion conversion
at Jan. 1 of preferred of bonds
So, we omit the convertible bonds from the calculation and diluted EPS is $3.94.
That’s why we should include securities in the calculation in reverse order,
beginning with the lowest incremental effect (most dilutive).
* 60 million shares x $2
** $900 million x 10%
Requirement 1
(amounts in thousands, except per share amount)
Basic EPS:
preferred
net income dividends
weighted-average
shares
With conversion of preferred stock
(Diluted EPS):
net income
weighted-average conversion
shares of preferred
shares
Since the assumed conversion of the convertible preferred stock causes
EPS to increase, it is antidilutive and therefore ignored when calculating
EPS.
Problem 19–15
Problem 19–15 (concluded)
Requirement 2
Basic EPS:
net income
weighted-average
shares
With conversion of bonds:
after-tax
net income interest savings
weighted-average conversion
shares of bonds
Since the assumed conversion of the convertible bonds causes EPS to
increase, it is antidilutive and therefore ignored when calculating EPS.
Requirement 3
Since the exercise price is less than average market price, the options are
Requirement 4
Since the exercise price is higher than the average market price, the
Requirement 5
The 5,000 shares are added to the denominator when calculating diluted
(amounts in millions, except per share amounts)
Basic EPS
net
income
shares new
at Jan. 1 shares
Diluted EPS
net after-tax*
income interest savings
shares new conversion
at Jan. 1 shares of bonds
*Interest on the bonds = $300 million x 10% = $30 million. If the bonds were not
(amounts in thousands, except per share amounts)
Problem 19–16
Problem 19–17
Basic EPS
net preferred
income dividends
shares new
at Jan. 1 shares
Diluted EPS
net preferred preferred
income dividends dividends
shares new assumed exercise
at Jan. 1 shares of options of preferred
shares
**Assumed purchase of treasury shares
÷ $40 (average market price)
15,000
shares
(amounts in millions, except per share amounts)
Problem 19–18
Basic EPS
net preferred
income dividends
shares new
at Jan. 1 shares
Diluted EPS
net preferred after-tax
income dividends Interest savings
shares new exercise conversion
at Jan. 1 shares of options of bonds
*Preferred dividends: 6% x $50 x 20 million shares = $60 million
**Computation of treasury shares:
Requirement 1
(amounts in millions, except per share amount)
2018 Basic EPS
net
income
shares
at Jan. 1
2018 Diluted EPS
net
income
shares assumed exercise assumed vesting
at Jan. 1 of options of restricted stock
* Reacquired shares for assumed exercise of stock options in 2018:
30 million options
** Calculation of proceeds from unexpensed compensation:
2017 ($ in millions)
2018
Problem 19–19
Problem 19–19 (continued)
So, $30 million compensation (for 2019) remains unexpensed and is
considered part of the hypothetical proceeds of the options.
Restricted Stock Award
Like stock options, restricted stock awards represent potential common shares
and their dilutive effect is included in diluted EPS. In fact, they too are
*** Reacquired shares for assumed vesting of restricted stock in 2018:
**** Calculation of proceeds from unexpensed compensation:
2018 ($ in millions)