- Dilutive securities (41)
- Stock options, warrants, convertible debt, convertible preferred stock that decrease EPS if converted to common stock.
- Anti-dilutive securities (42)
- Stock options, warrants, convertible debt, convertible preferred stock that increase EPS if converted to common stock
- Warrant and stock option
- Treasury stock method (43)
- To calculate the number of shares used in the denominator
- When option and warrants are dilutive
- The funds received by the company would be used to purchase shares of company’s common stock at the average market price
- Number of shares outstanding = number of shares created by options – number of shares repurchased with the proceeds of exercise.
- In this example, the firm issued 667 shares to buyer for free, each share value is at $30.
- Diluted EPS equation (44)
- Adjusted income available for common shares = net income – preferred dividends + dividends on convertible preferred stock + after-tax interest on convertible debt.
Note:
- Dilutive securities:
- financial instruments like stock options, warrants, convertible bonds, etc. which increases the number of common stock, if exercised.
- Prefer dividends
- dividends that are accrued paid on a company’s preferred stock
- Preferred shareholder:
- generally callable at the company’s option.
- Unlike common shares, preferred shares do not come with voting rights.
- stock that entitles the holder to a fixed dividend,
- preferred shareholders have priority over common shareholders
- means dividends must always be paid to preferred shareholders before they are paid to common shareholders.
- In the event of corporate bankruptcy proceedings and liquidation, bonds take preference over preferred stock when receiving payments.
- Shares repurchased for the treasury
- Treasury shares are the shares which are bought back by the issuing company, reducing the number of shares outstanding on the open market
- Convertible bond
- A bond that can convert to common stock share
- Warrants
- A derivative that give the right but not obligation to buy or sell security
- Convertible preferred stock
- a type of preferred stock that gives holders the option to convert their preferred shares into a fixed number of common shares after a specified date
- Stock option
- Contract between two parties in which the stock option buyer (holder) purchases the right (but not the obligation) to buy/sell 100 shares of an underlying stock at a predetermined price from/to the option seller (writer) within a fixed period of time.