Earnings per share for xyz Company Term Paper Example | Topics and Well Written Essays - 1250 words

Earnings per share for xyz Company - Term Paper ExampleThey normally give Earning per share a authorized distinction among the financial ratios. Earnings per share are considered very important in a bank line since it allows the investors to know how much the business earned in their store share investment. In other words, EPS shows how much in terms of take in income did the business earned for each stock share owned. introductory EPS proportionality The essential EPS is given by the equation EPS = Net Income / Total compute of stock share (Wiley, 2013). For example, in the following income statement, the companys $32.47 million net income is divided by the 8.5 million shares of stock it owns to get the $3.82 EPS. Income statement for the year 2010 Sales revenue $457,000 Cost of goods sold expense $298,750 Gross Margin $158,250 Sales, regime and general expense 102, 680 Earnings before interest and income tax $55,570 Interest expense 6,250 Earnings before income tax $49,320 Income tax expense 16,850 Net income $32,470 Basic earnings per share $3,82 Diluted earnings per share $3,61 EPS = 32.47million/8.5million = $3.82 For the stakeholders of businesses whose shares are publicly traded, EPS becomes extraordinarily important. The stakeholders therefore need to pay close attention to the market cost per share. In such cases, the stakeholders would prefer their net income to be communicated to them in terms of per share so that they can be able to compare it with the market harm of the stock per share (Bryan, 2011). Unlike publicly owned companies, the stock shares of privately owned companies are not traded actively. This is because they do not have to report their EPS harmonise to the GAAP. This exemption is explained by the fact that their stockholders do not focus on per share values but are instead interested in the businesss net income. The Diluted EPS Ratio The XYZ Company could be listed in the New York Stock Exchange (NYSE) given the assumption that its shares are traded at $70 per share. Well known as the Big Board, requires that requires that the market capital which includes the total of the shares issued and the outstanding shares, should be at the least, $100 million and the number of shares available for barter should be at least 1.1 million. The Companys market capital is $595 million with the 8.5 million shares trading at $70 per share and this is well preceding(prenominal) the NYSEs minimum. By the end of the year, this company has 8.5 million shares just outstanding. This number refers to the number of stock shares that have been issues and are now owned by its stakeholders. Therefore, the Earnings per share is $3.82 as has been computed. Nevertheless, a complication sets in when the business is committed to issuing supernumerary capital stock shares in the future for stock options granted to the executives by the company, and it has funds borrowed on the basis of debt instruments. This particularly gives the lenders the right to convert the debt into its capital stock. Following that, the business may have to issue 500,000 additional capital stock shares in the future under terms of its management options as well as its convertible debts. When we divide the net income by the number of the outstanding shares plus the additional shares that could be issued in the future, the following EPS computation emerges $32.47million net income ? 9million capital stock shares issued and potentially issuable = $3.61 EPS This second computation, as can be seen, has higher number of stock shares and is therefore referred to as diluted earnings per share. The term diluted is used to refer to thinned out or blossom out over a large number of shares. That notwithstanding, the