a. Explain the concepts of basic and diluted earnings per share. b. compute basi

Question

a. Explain the concepts of basic and diluted earnings per share.

b. compute basic and diluted EPS for 2012.

c. what is the effect of dilutive securities on EPS, in percentage terms?

Cleantech Solutions International reports the following information in footnotes to its 2012 Form 10-K net income available to common shareholders for basic and diluted net income per commonshare $ 4,198,580.00 weighted average common shares outstanding - basic $ 2,538,246.00 Effect of dilutive securities:
Series A convertible preferred stock $ 103,149.00 Warrants $ 7,648.00 weighted average common shares outstanding - diluted $ 2,649,043.00

Explanation / Answer

Part A)

Basic EPS is simply Net income divided by no. of shares outstanding. It does not include convertibles in outstanding shares. Diluted Earnings Per share also includes convertibles in the denominator. Therefore, generally Diluted EPS is smaller than basic EPS.

Part B)

Basic EPS = Net income/ common shares outstanding –basic

                   = 4,198,580 / 2,538,246

                   = 1.65

Diluted eps = Net income/ common shares outstanding –diluted

                       = 4,198,580 / 2,649,043

                     = 1.58

Part C)

Decrease in EPS = (1.58-1.65)/1.65

                                =-4.24%

Because of dilutive securities, EPS fell by 4.24%

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