The flashcards below were created by user
kchiccarine
on FreezingBlue Flashcards.
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Why do companies make preferred stocks and bonds convertible?
It increases the marketability of the securities
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When a bond or preferred stock is converted, it creates more shares of common stock and is called "dilutive"
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Indicates the income earned by each share of common stock
Earnings per share (EPS)
Can be calculated for each component of income
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Capital structure that only has common stock
Simple capital structure
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Capital structure that has potentially dilutive securities such as convertible securities, options, warrants or other rights
Complex structure
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Formula for EPS
EPS= (Net income less preferred dividends) / weighted average # of shares outstanding
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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
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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
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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
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