1. Scenario Technical Specifications
For the year ending 31 December 2026, a public company reports the following financial parameters:
  • Net Income achieved: $4,100,000 (All from continuing operations).
  • Common Shares Outstanding Balance: 1,000,000 shares outstanding across the entire year.
  • Corporate Tax Rate: 20%
  • Potential Share Instrument A: 100,000 stock options outstanding with an exercise price of $30 per share. The average market price of the company’s common stock during 2026 was $50 per share.
  • Potential Share Instrument B: $2,000,000 face value of 5% convertible bonds issued at par in a prior year. Each $1,000 bond is contractually convertible into 40 common shares.

2. Step-by-Step Computational Analysis
  • Step 1: Compute Basic EPS
    Since there are no preferred dividends, the calculation is straightforward:

    Basic EPS = Net Income / Weighted-Average Shares = 4100000 / 1000000 Shares = 4.10 per share
  • Step 2: Evaluate Options (Instrument A) using Treasury Stock Method
    • Cash proceeds generated from assumed exercise: 100,000 options × $30 = $3,000,000
    • Shares repurchased at market price: $3,000,000 / $50 per share = 60,000 shares
    • Net share expansion added to denominator: 100,000 – 60,000 = 40,000 incremental shares
    • Running EPS check (Options only):

      EPS = 4100000 / (1000000 + 40000) = 4100000 / 1040000 = 3.94 (Dilutive, keep instrument)

  • Step 3: Evaluate Convertible Bonds (Instrument B) using If-Converted Method
    • Interest paid on bonds: $2,000,000 × 5% = $100,000
    • After-tax interest savings added to numerator: $100,000 × (1 – 0.20) = +$80,000
    • New shares added to denominator upon conversion:
      2000000 / 1000 × 40 = 80000 incremental shares

3. Final Combined Diluted EPS Calculation
To find the final Diluted EPS figure, include both dilutive instruments in the total running equation:
Diluted EPS = (Net Income + After-Tax Interest Savings) / (Basic Share Pool + Options Net Expansion + Bond Shares Conversion)
Diluted EPS = (4100000 + 80000) / (1000000 + 40000 + 80000) = 4180000 / 1120000 Shares = 3.73 per share
[Income Statement Face Reporting Presentation Summary]
  • Basic Earnings Per Share:   $4.10
  • Diluted Earnings Per Share: $3.73
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