Chapter 16

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  1. Why do companies make preferred stocks and bonds convertible?
    It increases the marketability of the securities
  2. When a bond or preferred stock is converted, it creates more shares of common stock and is called "dilutive"
  3. Indicates the income earned by each share of common stock
    Earnings per share (EPS)

    Can be calculated for each component of income
  4. Capital structure that only has common stock
    Simple capital structure
  5. Capital structure that has potentially dilutive securities such as convertible securities, options, warrants or other rights
    Complex structure
  6. Formula for EPS
    EPS= (Net income less preferred dividends) / weighted average # of shares outstanding
  7. Formula for diluted EPS
    NI less pref dividends + Bond Int expense (1-tax rate)

    divided by

    weighted average # of o/s + c/s equivalent + options + warrants
  8. Formula for determining the c/s equivalent of stock options
    (Mkt price - Exercise price)/Mkt price

    multiplied by

    the # of stock options

    If it is a negative #, no one will exercise the option
  9. How do you determine if a security is antidilutive?
    Calculate basic EPS

    Calculate diluted EPS assuming the security is converted

    If diluted EPS > basic EPS, the security is antidilutive
Card Set
Chapter 16
Dilutive Securities and EPS
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