Public enterprises are required to present earnings per share data on the income statement. Consider the effect of dilutive and antidilutive convertible securities. Discuss this information from the perspective of a shareholder, and discuss what shareholders would expect to discern from this information.In your responses to your peers, discuss potential challenges that might arise from the presentation of this information and shareholders’ interpretations. How should this information be communicated to shareholders?
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Response to caleb
Diluted earnings per shares as defined by Whalen, Jones, & Pagach, (2017) is “the earnings per share
after including all potential common shares that would reduce earnings per share”, which from an
investors point of view is usually previous stock options that are less desirable because their stock prices
were lower. For example, “a firm’s share price is $30, vested stock options with an exercise price of only
$25 would be dilutive” because their stock price is less desirable and therefore dilutive earning per share
is all these stock options that are less desirable from an investors point of view. (Whalen, Jones, &
Pagach, 2017) Dilutive convertible securities if high can bring the value of the offered stock down since
calculating dilutive earnings per share includes the most dilutive share price and the least which gives
investors the average. Antidilutive convertible securities are all securities that except the diluted ones that
are calculated in a process known as tentative earnings per share. This process increases the numerator
and denominator in earnings per share calculation repeated until diluted earnings per share are excluded.
(Whalen, Jones, & Pagach, 2017) Diluted Earnings per share, when presented on an enterprises’ income
statement, gives investors a more honestly earnings per share ratio since less desirable convertible
securities are included.
Wahlen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate Accounting: Reporting and analysis
(2nd ed.). Boston, MA: Cengage Learning.
Response to catrina
As a shareholder, it is important to be aware of how dilutive and antidilutive convertible securities can
impact earnings per share. Dilution happens when the average market price is more than the exercise
price (Whalen, Jones, Pagach, 2017). A shareholder can determine the potential earnings per share if
they converted securities to common stock by looking at the diluted earnings per share on the income
statement. The diluted earnings per share indicates the worst case scenario if investors converted to
common stock (EDUCBA, n.d.). If diluted earnings per share is less than basic earnings per share, it is a
diluted security and reported on the income statement (Vaidya, n.d). Since there would be more common
stock issued, shareholders would have a lesser piece of the pie, earning less money per stock share.
When a security is converted to common stock and earnings per share increases, it is an antidilutive
security. An antidilutive security could be caused by an acquisition of a company. This happens when
earnings per share (denominator) is smaller in proportion to the income (numerator). When an antidultion
happens, it should not be included in the income statement when calculating diluted earnings per share
EDUCBA. (n.d.). Excited To Know The Difference Between EPS and Diluted EPS. EDUCBA. Retrieved
Money-Zine. (n.d.). Antidilutive Securities. Retrieved from: https://www.moneyzine.com/definitions/investing-dictionary/antidilutive-securities/
Vaidya. (n.d). Antidilutive Securities. Wall Street Mojo. Retrieved from:
Whalen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate accounting: Reporting and analysis.
Boston, MA: Cengage Learning.
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