Can someone explain in very simple terms the difference between diluted eps for convertibles and diluted e.p.s for options and warrants..thanks..
last example was a bit too lenghty to easily grasp..

First of all we need to understand a difference between Convertables and Warrants(Options)..

CONVERTABLES:-

Convertables are lone notes which are issued at lesser interest rate and the entity gives investors a choice of whether to redeeme their debt note or to convert it in to Ordinary shares(i.e Equity) for example a company has issued

8% 10,000 "$100" loan notes "$1,000,000" these can be redemed after 5 years at par or can be converted into equity shares each $100 note can be converted into 30 ordinary shares..

Now consider the situation after 5 years: the market vale of ordinary shares is $3...

now $3*30 Shares===>$90 will be the value of each $100 loan note...
contrary its redemption rate is $100(because they are redemable at par)...

what to choose, it simlple, its Redemption's Option...

In case of convertables either loan notes are redeemed or they are converted into equity this implies that their will be no Debt intact so no interest will be paid and thus, interest cost will be saved if they are converted...

For example if a loan note value $100 yielding interst at 8%(that is $8 ) has beed converted into 20 equity shares, thus, by converting it into equity entity has saved to pay ineterst of $8 therefore no more interest will be paid now...

DILUTED EPS===>Earnings + Notional Profit
============_______________________

============Ordinary Shares+Potiential Ordinary Shares

If our earnings were $5,000 and our Outstanding Ordinary shares were 2,500 thus by applying the situation in above example

DILUTED EPS===>5000 + 8(Savings in Interest)
============_______________________

============2,500+20(potiential untill the Conversion)

Diluted EPS will be $1.9873

Basic EPS was(5,000/2,500)==>$2...

EPS has been diluted by 0.0127...

WARRANTS:-

Before going towards warrants we have to understand that in Convertables loan has removed and it has changed into equity whereas, in warrants loan remains intact....

Warrants are basically an option given to share holders that for examples a company has issued loan notes 8% 10,000 '$100' loan notes at the time when company issued loan notes at 8% the lenders can easily yield 12% interest on their investments but the company has also given a chance to obtain 10 shares to the lenders who are having 1 debt note these shares can be purchased from the company at the rate of $2.5 per share after 3 years of issuance of debt notes...

Now after 3 years situation becomes as "the share price of company was $5 per share"...now, debt holder will pau company "$2.5" and the holder of every 1 debt can buy 10 Shares thus 10@$2.5==>$25 and subsequently can sell at $5 thus yielding a profit of $25...

As i have already told you that in warrants debt remains intact and therefore no change has been made in interest paid but a change will be made in potiential Ordinary shares remember the formulae discussed earlier;

DILUTED EPS===>Earnings + Notional Profit(will be zero because loan is intact)
============_____________________________________

============Ordinary Shares+Potiential Ordinary Shares

Again see the example, If our earnings were $5,000 and our Outstanding Ordinary shares were 2,500 thus by applying the situation in above example,


DILUTED EPS===>$5000 + 0(Loan in intact thus no saving in interest)
============___________________________________________

============2,500+10(potiential untill the Conversion)

Diluted EPS will be $1.99203
Basic EPS was be $2

Net Dilution is $0.007968

Warrants are most dilutive item becaus it adds nothing in numerator but adds shares in denominator thus it is a high dilutive item...

I Hope this helps You,


Regards,


Muhammad Amir.

yea........thank you amir

Nyc work.....i have got a question bout EPS,,not relevant to this but others.....

when we calculate EPS why do we time apportion them ...i mean y weighted average ??? I read bout EPS today....i always calc EPS by total number of ordinary share.... like in F9 also ,,,to measure financial performance i always calc. EPS by total number of ordinary shareholder. But in F7 only in EPS chapters and other question directly related to EPS calc. i see weighted average shreholders.... Can u pls explain the logic behind doing this ???

Also while measuring performance of company like I did F9, F5 even if shareholders change we calculate the shareholders which is at the end pf yr (at the B\S date). Y dont we do like the weighte method ?? please explain me the reasoning behind this two.

if you do not time apportion, the dividends paid will be the same for all shareholders so it won't be fair to those who buy the shares earlier and supported company for longer period

dividends ?? no...EPS is not all related to dividend...dividend is DPS not EPS....DPS is not calculated by weighrted average as far i as i know...suppose if a compny issues shares just 1 month before delcaring dividend...the holder who will buy the shares before the 1 month is entitled to receive the full dividend....ryte ?? dats wat i while consoliation......amir md. can u help me out pls ??

Dear Asif,

Your question is very valid question.

Dear, as you know that under International Financial Reporting Standards Committee's guidlines Financial Statements of Entities should be reliable and relevant this reliability and relevanace is at the heart of Financial Reporting Standards.

In F9 we use our calculations just for the evaluation purposes and for measuring the performance of entities for example ion whole F9 saylabus you haven't came across the term "Diluted EPS" while in Financial Reporting Papers this is the mandatory element to be disclosed in financial statements.

The purpose to Divide the Earnings by Weighted Average Numbers of Ordinary Shares is to provide the users more relevant and reliable information.

For example Entity has issued 5,000 share at the start of the year(i.e. at 1/1/01) and issued 1,000 further shares after nine months period(i.e. on 1/10/01).

So according to above example the 5,000 issued shares at the start of the year are entitled for the earnings of 9 months exclusively and thus new issuance which has taken place at the 10th month has no stake in full earnings because they became members of the organitaion at the 10th month.

So, if for example entity has made total profits after tax of $40,000 so its EPS would be.

Profits/Weighted Average Number Of Ordinary Shares.

Weighted Average Number Of Ordinary Shares=5,000/12*10(these 5,000 share holders are members since beginning till 10th month)==>4167shares plus 6,000/12*3(5,000 old ones plus 1,000 new ones are applicable for rest of the earnings jointly)==>1500shares.


Total Weighted Average Number Of Shares==>(4167+1500=>5667).

EPS=(40,000/5667=>$7.06/Share).

I hope That HElps!!

Regards,

Muhammad Amir