Convertible Preferred Stock Impact on EPS | Impact & Examples (2024)

FAQs

Convertible Preferred Stock Impact on EPS | Impact & Examples? ›

For companies with convertible preferred stock, the dividends paid out to these shareholders decrease the net income available to common shareholders. This reduction in net income leads to a lower basic EPS, assuming the number of common shares remains constant.

The convertible preferred stock is dilutive to B's EPS because the dividends on the preferred stock per common share obtainable on conversion are less than basic EPS. The convertible debt is dilutive to B's EPS because the interest expense (net of tax) per common share obtainable on conversion is less than basic EPS.

Dividends on preferred stock affect the numerator in the calculation of EPS, whereas dividends on common stock generally have no impact on EPS unless the two-class method of calculating EPS is required.

For convertible bonds, diluted EPS is also calculated using the if-converted method. If the convertible bonds had been converted, we would have two effects: No more convertible bonds, but additional common stock outstanding. No interest paid on convertible debt, but taxable income increases.

To incorporate convertible securities into the calculation of diluted EPS, the conversion is assumed to have occurred at the beginning of the period (or at the time the convertible security is issued, if later).

Convertible preferred stocks will have an impact on the EPS numerator as preferred dividends will no longer exist upon the conversion of preferred stock into common stock and will have an impact on the denominator as the conversion of preferred stock into common stock will increase the amount of common stock applied to ...

It compares the company's net earnings against its current number of shares. Calculating diluted EPS includes shares that a company may be obligated to issue in the future. Convertible preferred stock, stock options, and convertible bonds are common types of dilutive securities.

Basic EPS = (Net income - preferred dividends) ÷ weighted average of common shares outstanding during the period. Net income can be further broken down into 'continuing operations' P&L and 'total P&L' and preferred dividends should be removed as this income is not available to common stockholders.

However, if the company has preferred dividends, we must subtract the value of the dividends paid out to preferred shareholders, because preferred dividends are treated “debt-like.” Preferred Shareholders → Preferred shareholders, as implied by the name, take precedence over common shareholders.

Basic EPS Formula

Net income available to shareholders for EPS purposes refers to net income less dividends on preferred shares. Dividends payable to preferred shareholders are not available to common shareholders and must be deducted to calculate EPS.

What is an example of a diluted EPS? ›

Diluted Earnings per Share Example

Suppose ABC Company reports its net income at $100,000. It also has 100,000 shares of common stock outstanding. The company also has 10,000 shares of convertible preferred stock and $200,000 of convertible debt outstanding. As you can see, diluted EPS equals $1.00.

Breaking down the numerator – Net income and preferred dividends. The numerator in the calculation of diluted EPS includes the net income available to common shareholders after adjusting for any preferred dividends paid. The company prioritises paying preferred dividends over other dividends to common shareholders.

Several factors influence the extent of EPS dilution caused by stock options. These include the number of options outstanding, the exercise price, the stock price at the time of exercise, and the number of shares repurchased by the company to offset the dilution.

Convertible securities are potentially dilutive securities and part of diluted earnings per share if their change builds the EPS numerator less of what expands the EPS denominator, i.e., the EPS with transformation is not exactly the EPS before conversion.

Companies can manipulate EPS numbers by engaging in share buybacks. By buying back shares, a company can decrease the number of outstanding shares, which in turn increases the EPS number.

Basic EPS is always higher than diluted EPS and at best the Diluted EPS can be equal to the Basic EPS. That is because; in diluted EPS all convertible securities are added to the common shares in the denominator. Remember, EPS is the first step to calculating the P/E Ratio as a valuation metrics.

The Diluted EPS formula is equal to net income less preferred dividends, divided by the total number of diluted shares outstanding (basic shares outstanding plus the exercise of in-the-money options, warrants, and other dilutive securities).