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Chapter 5: Q7DQ (page 622)

Explain the difference between basic earnings per share and diluted earnings per share.

Short Answer

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Answer

Basic earnings per share considers just those shares that are accessible for trading, that might be higher than a company's total number of outstanding shares. Diluted earnings per share is just a company's net income divided by its outstanding shares and convertible securities.

Step by step solution

01

Introduction to earnings per share

Earnings per share calculated on a quarterly or annual basis and it describes a public company's profit per outstanding share of stock.

02

The difference between basic earnings per share and diluted earnings per share

Dilutive earnings per share consider all of the potentially dilutive impacts of warrants, convertibles, and other securities that can create new shares of common stock.

More specifically, Basic earnings per share only uses number of sharses of common stock to estimate the per share earning.

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Most popular questions from this chapter

Solar Energy Corp. has $4million in earnings with 4 million shares outstanding. Investment bankers think the stock can justify P/E ratio of 21. Assume the underwriting spread is 5 percent. What should the price to the public be?

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Question: Barton Simpson, the chief financial officer of Broadband Inc. could hardly believe the change in interest rates that had taken place over the last few months. The interest rate on A2 rated bonds was now 6 percent. The \(30 million, 15-year bond issue that his firm has outstanding was initially issued at 9 percent five years ago. Because interest rates had gone down so much, he was considering refunding the bond issue. The old issue had a call premium of 8 percent. The underwriting cost on the old issue had been 3 percent of par, and on the new issue it would be 5 percent of par. The tax rate would be 30 percent and a 4 percent discount rate would be applied for the refunding decision. The new bond would have a 10-year life. Before Barton used the 8 percent call provision to reacquire the old bonds, he wanted to make sure he could not buy them back cheaper in the open market.

a. First compute the price of the old bonds in the open market. Use the valuation procedures for a bond that were discussed in Chapter 10 (use annual analysis). Determine the price of a single \)1,000 par value bond.
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