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Threat of firing

4. Threat of takeover

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Firms with publicly held common stock or potential common stock are required to report EPS information in the Financial Statements. Potential common stock includes securities such as stock options, warrants, convertibles, and contingent stock agreements.

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SIMPLE CAPITAL STRUCTURE

A corporation's capital structure is considered SIMPLE if it consists only of common stock or include no potentially dilutive convertible securities, options, warrants, or other rights that upon conversion or exercised could in total dilute EPS of common shares (the term DILUTIVE is to be explained later in this article). The formula for calculating EPS is:

Net income preferred dividends

_____________________ ______

Weighted Average Number of Shares Outstanding

If the preferred stock is cumulative and dividend is not declared during the period, it constitutes the basis for the per share amounts reported. Shares issued or purchased during the period affect the number of outstanding shares and must be weighted by the fraction of the period they are outstanding. When stock dividends or stock splits occur, calculation of the weighted average number of share require restatement of the shares outstanding before the stock dividends or split (they are assumed to have been outstanding since the beginning of the year).

If a stock dividend or stock split occurred AFTER the end of the year, but BEFORE the Financial Statement are issued, the weighted average number of shares outstanding for the year and any other years presented in comparative form must be restated.

COMPLEX CAPITAL STRUCTURE

A firm is considered to have a COMPLEX capital structure if it includes securities that could have a dilutive effect on earnings per common share. A COMPLEX capital structure requires a dual presentation of EPS each with equal prominence of the face of the Income Statement. The dual presentation consists of basic EPS and Diluted EPS. However, if the securities in the capital structure are antidilutive, that is, they increase EPS, companies with COMPLEX structure do not report this.

Remember that EPS is computed only for common stock, not for preferred stock.

For instance a corporation that earned $10 million last year and has 10 million common shares outstanding would report earnings of $1 per share. The figure is calculated after paying taxes and after paying preferred shareholders and bondholders. The company must report earnings per share in two levels: BASIC EARNINGS PER SHARE

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