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Stock split effect EPS ,net assets, WASO, convertible, DEPS

Lee Corporation releases its financial statements with a simple capital structure for EPS. This period has seen a significant rise in stock price, and to make more shares available at a lower price, the company has planned on a two-for-one stock split. What effect would this have on EPS, net assets, and WASO? Do you recommend that Lee Corporation go ahead with the two-for-one split? Why or why not?

Question 2

There are times when a company has a convertible security that is considered to be antidilutive.

What is the proper accounting treatment of these securities with regard to EPS calculations? What effect do antidilutive securities have on EPS? Do you think that they should or should not be included in the calculation of EPS? Why or why not? Do the antidilutive securities have an effect on the stakeholder's perspective of the company's financial position?

Solution Preview

1. Lee Corporation releases its financial statements with a simple capital structure for EPS. This period has seen a significant rise in stock price, and to make more shares available at a lower price, the company has planned on a two-for-one stock split. What effect would this have on EPS, net assets, and WASO? Do you recommend that Lee Corporation go ahead with the two-for-one split? Why or why not?

EPS: Will drop in half. The numerator (Net Income Less Preferred Dividends) is the same but the denominator (weighted average common shares outstanding) is double. Stock splits are retroactive in the numerator of EPS WASO computations so it is exactly double. That would make the EPS drop in half. See example:

$5,000 / 1,000 shares = $5 ...

Solution Summary

Your tutorial is 301 words and explains how a stock split impacts the weighted average common shares outstanding, net assets and the earnings per share (EPS) computation. The effect of potentially dilutive shares is discussion and an opinion is offered on whether they should impact EPS.

$2.19