Basic EPS and Diluted EPS

Basic EPS
Basic EPS = (net income – preferred dividends) / (weighted average no. of outstanding common shares

Diluted EPS

• Treat any dilutive securities as if they were converted to common stock from the first of the year or when issued if issued during the current year.
• Only income from continuing operations is considered in determining diluted EPS

To determine whether a convertible security is dilutive,

Convertible pfd. dividends / no. of shares from conversion of pfd, or
Convertible debt interest (1-tax rate) / no of shares from conversion of debt

If the amount is less than basic EPS, the security is dilutive.

Diluted EPS = adjusted income available for common shares / weighted average common and potential common shares outstanding

Adjusted income available for common shares = earnings available for common shares + dividends on dilutive convertible preferred stock + after tax interst on dilutive convertible debt

Diluted EPS = [(net income – preferred dividends) + convertible preferred dividends + (convertible debt interest)(1-t)] / [weighted average shares + shares from conversion of conv. pfd. Shares + shares from conversion of conv. debt + shares issuable from stock options]