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Dilutive Securities and Diluted Earnings Per Share - College Paper

Dilutive Securities and Diluted Earnings Per Share

Securities may be either dilutive or antidilutive. Dilutive securities are securities such as stock options, convertible debt, or convertible preferred stock that decrease earnings per share (EPS) if they are exercised or converted to common stock. On the other hand, antidilutive securities are securities that upon conversion or exercise increase earnings per share (or reduce the loss per share). Antidilutive securities should be ignored and should not be considered in computing diluted EPS because the intent of accounting rules is to inform the readers of the possible dilution that may occur in reported EPS. For this same reason, dilutive securities must be considered in computing ...

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and gives the firm an additional $450,000 in cash. The firm could then use the $450,000 to purchase 18,000 shares at the market price which is still $25, leaving a net decrease of 3,000 in shares outstanding (15,000 - 18,000). This is antidilutive because the number of shares outstanding has decreased. An intuitive way to think about this is that no one would exercise a warrant if exercise price is greater than market price unless they intentionally wanted to lose money, an unlikely event. Thus, in this situation, you would not calculate the effect because in must be antidilutive.[1]
Another way of illustrating why this situation is antidilutive is by beginning with a calculation of Basic EPS which is earnings divided by average shares outstanding. In this case, Basic EPS is 2.28, a number derived by dividing earnings of $228,000 by 100,000 shares outstanding. Diluted EPS is equal to Basic EPS minus the dilutive impact of convertible securities (not considered in this ...

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Dilutive Securities and Diluted Earnings Per Share. (2016, March 15). Retrieved November 28, 2024, from http://www.essayworld.com/essays/Dilutive-Securities-Diluted-Earnings-Per-Share/105480

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"Dilutive Securities and Diluted Earnings Per Share." Essayworld.com. March 15, 2016. Accessed November 28, 2024. http://www.essayworld.com/essays/Dilutive-Securities-Diluted-Earnings-Per-Share/105480.

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PAPER DETAILS

Added: 3/15/2016 04:00:21 AM
Category: Economics
Type: Premium Paper
Words: 627
Pages: 3

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