Now, as we go through this, what we need to do is we need to kinda set it up so that it's
understandable.
So, what I'm gonna do is I'm gonna set up here the two types called basic and diluted.
And as you calculate it, it's what?
It's something divided by something to get your earnings per share.
So as we look at this, I'm gonna start here with my basic earnings per share, which is
simple.
And that is your basic or your simple earnings per share.
That assumes there's nothing potentially dilutive.
Then, we're gonna go on to our diluted earnings per share, which is your complex system, which
is anyone who could convert, does so.
So, we're gonna go through this and we're gonna calculate it.
We're gonna have this divided by something.
So, up here we're gonna have the dollars and we're gonna divide it by a certain number
of shares.
Remember in, what was it, stockholders equity, we did a long, task-based simulation, and
one of the questions asked you to calculate earnings per share, or book value per share.
So, there's something per share.
It's dollars divided something equals dollars, right.
So, like dollars over non-dollars equals dollars.
So, dollars over shares equals dollars per share.
That's what we're gonna be trying to calculate.
Now, in looking at this, first of all, we start out with your simpler basic.
Now, when you do a formula, the top is the numerator, and I'll put that here, numerator.
The bottom is d-d-d-d-down, denominator.
Okay, just in case you didn't know that, or maybe in your country you don't use that terminology.
Numerator top, d-d-d-d-down denominator.
So in a fraction, like four over two, that's the numerator, that's the denominator, and
that equals two.
So, numerator, denominator, so as we go through this, the numerator is the top, d-d-d-d-down
denominator.
In the numerator, we're gonna start out with our net income.
So, we have our net income, and that's our total net income minus something.
And this minus something is going to be minus preferred dividends.
So this is minus the preferred dividends, why?
Because we're trying to figure out the money we have available to give to the common shareholders.
Who gets paid first, preferred.
So, preferred gets first, that money's not there for the common.
So, we're gonna take our net income, we're gonna have to take out our preferred dividends.
But, I'm gonna put a little A here because I want to note what this A means.
What the A says is with preferred, remember we talked about preferred stock, we said it
could be what, cumulative or non-cumulative.
Cumulative or non-cumulative.
So, cumulative means that if you don't declare it, you owe it the next year or the next...
When you finally declare a dividend, it accumulates in arrears, where's your rear, behind you.
So, it's old, behind dividends, you owe that money eventually.
So, it's not a liability 'til it's declared, but if it's not declared, it's cumulative,
we still footnote the fact that eventually we're gonna owe this.
That is called cumulative.
Non-cumulative means hey, if you don't declare this dividend, it is b-b-bye, bye, bye, lost
forever.
So, let's think about it, if it's cumulative, will you eventually owe it, yes.
So, I'm gonna take it out, if it's cumulative, you're gonna take that out, cu-mu-la-tive,
whether declared or not.
So even if it's declared, to declare or not declare, that is the question, right, remember
Shakespeare?
To be or not to be, to declare or not to...
So, even if it's not declared, you still take it out.
If it's non-cumulative, only if declared, why is that?
Because if it's non-cumulative, if you don't declare it, it's lost forever, you're never
gonna owe it.
If it's cumulative but you don't declare it, you're gonna eventually owe it.
So, we're gonna take it out, but for how many years?
This is an important point, for one year only.
And the reason I mention that is, let's think about it.
If I don't declare a dividend, do I take it out this year?
Yes, because let's assume it's cumulative.
I don't declare it, it's cumulative, you take it out.
'Cause it's theoretically as if you paid it.
So then next year, we still don't declare it, you take it out for next year, next year's,
but not this year 'cause this year's was already done.
So it's one year only, this year only, this year only, this year only.
'Cause it's again, what is earnings per share?
It's a theoretical number, theoretically speaking, if we were to give away all our money to the
common shareholders, how much would they get?
Well, theoretically speaking, we would've had to pay this cumulative whether declared
or not.
Now, if it's non-cumulative, if it's declared, you're gonna owe that anyway, so you take
it out.
If it's non-cumulative, you're eventually gonna owe it, so assume it was paid, take
it out.
What's left goes to common.
Does that make sense, I hope so.
Okay, so that's the concept, that's what were' looking at so far.
So, in your notes you'll see, "Earnings, net income minus preferred, since EPS is computed,
being computed for common stock, earnings must be reduced by dividends payable to preferred
shareholders.
If the preferred stock is not cumulative, only dividends actually declared during the
year are subtracted.
If it is cumulative, the annual dividend of preferred is subtracted each year, regardless
of whether or not it's declared, since the amounts not paid accumulate and will never
be payable to common shareholders.� Because it doesn't go to common, it's gonna go to
preferred.� The effective participating�" Alright, more complicated on the exam.
So again, that's what they're saying , as far as the top or the numerator, that's gonna
give you the money available to the shareholders.
Now, what are we gonna divide that with?
I'm gonna divide that by what I call number one.
And this stands for the weighted average number of common stock outstanding, huh?
The weighted average number of common stock outstanding.
Now, when we talk about the weighted average number of common stock outstanding, that says
on average, how many shares were outstanding for the entire year?
Now, what that means is actual sales, for example.
That would be like stock dividends, stock splits.
All of those are included as if they were applied what we call retroactively.
So, we assume that they happen at the beginning of the year.
So, there's a dividend, if there's a split, even if we issued it in July, we assume it
happened at the beginning of the year.
So, that means we assume that they were outstanding the whole year.