Earnings Per Share Calculations
Updated: Aug 10, 2021
How to calculate basic earnings per share
In order to calculate basic earnings per common share divide weighted average shares outstanding by net income available to common shareholders
Basic EPS = Net Income Available To Common Shareholders / Weighted Average # Of Share Outstanding
Calculating weighted average number of shares outstanding:
Beginning of the year | 100 shares outstanding
March 31 | Issued 20 shares
June 30 | Repurchased 35 shares
Net Income = $85
Dividends Paid = $25
Preferred Dividends = $35
What is the weighted average number of shares outstanding for the year?
First, determine the time length of each period. Every time the share count changes a new time period begins. In this case, the business has 100 shares outstanding for 3 months. The weight of that share number is therefore 3/12 which is .25. The weight is then multiplied by the number of shares outstanding in that period. Once this is done for all time periods the total is summed. The result is the weighted average common shares outstanding.
What is the net income available to common shareholders?
Net income available to common shareholders = Net income - Preferred Dividends
Note* Do not deduct dividends paid to common shareholders
Net income available to common shareholders = $85 - $35 = $50
Basic EPS = $50 / 97.5
Basic EPS =$.51
How to calculate diluted earnings per share
In order to calculate diluted earnings per share you should first familiarize yourself with the general method of calculating diluted shares outstanding here. After determining the diluted number of shares outstanding at each time period you may calculate the weighted average number of diluted shares outstanding in the same way as above.
An adjustment must be made to income available to common shareholders given our calculation of diluted shares outstanding. For example, if we assume conversion of convertible debt to common shares we must also adjust for the interest which would n longer be paid on that debt. If the total interest on the debt was $1,000,000 and the tax rate is 30% that means $1,000,000 *(1-.3) = $700,000 must be added back to net income available to common shareholders. It is important to remember that a tax adjustment must be made because by adding back the expense we increase EBT. Please see the link here for more information.