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Worked-example setupScope and assumptions
- Linden Peak, its income, dividends, dated share events, two-for-one split, award terms, market price, assumed proceeds, conversion terms, and contingencies are fictional and supplied for instruction.
- Income from continuing operations equals net income at $8.4 million; the current cumulative preferred dividend is $120,000.
- Common and potential share inputs are stated before a year-end two-for-one split and are retroactively adjusted by the computation; prices are adjusted inversely.
- Fifteen thousand unvested pre-split RSUs participate equally in dividends and receive $6,000 of distributed earnings.
- Employee-option assumed proceeds include $366,000 of supplied other proceeds; the average pre-split market price is $16.
- Contingent-share conditions are met at period end; the debt and preferred conversion numerator adjustments are after tax and supplied.
- Loss-period, multiple-class participation, actual midperiod conversion, discontinued-operation, and complex settlement-choice variants are addressed conceptually but excluded from this bounded computation.
- Period
- 365-day year ended December 31, 20X6
- Units
- US dollars, shares, days, and dollars per share
- Rounding
- Retain full precision through ordering; display EPS to two decimal places only after the final calculation
Problem
Linden Peak's draft divides $8.28 million by the December 31 common shares and then adds every possible share to diluted EPS. That ignores dated weighting, a year-end split, participating awards, instrument-specific methods, ordering, and antidilution. Build the numerator and denominator as controlled schedules.
Weight the common-share timeline
Every interval is first adjusted for the two-for-one split.
| Interval | Post-split shares | Days / 365 | Weighted shares |
|---|---|---|---|
| January–March | 1,920,000 | 90 / 365 | 473,425 |
| April–August | 2,320,000 | 153 / 365 | 972,493 |
| September–October | 2,200,000 | 61 / 365 | 367,671 |
| November–December | 2,240,000 | 61 / 365 | 374,356 |
| Weighted-average common shares | 2,187,945 |
The days cover the 365-day period exactly once. Ending shares are a point-in- time fact; weighted-average shares are a period fact.
Apply the two-class method before basic EPS
Income after the $120,000 current preferred dividend is $8.28 million. After $360,000 of common distributions and $6,000 of participating-RSU distributions, undistributed earnings are $7.914 million. The 30,000 post-split participating units receive $113,045 in total distributed and undistributed earnings. That leaves a $8,166,955 common numerator.
basic EPS = $8,166,955 / 2,187,945 = $3.73
The unvested awards are not in the basic common-share denominator. Their participation right changes the numerator through the two-class method.
Compute each dilution candidate before ordering
| Instrument | Incremental numerator | Incremental shares | Incremental EPS |
|---|---|---|---|
| Contingent shares | — | 40,000 | $0.00 |
| Employee options | — | 104,250 | 0.00 |
| Convertible debt | $180,000 | 160,000 | 1.13 |
| Convertible preferred | 200,000 | 50,000 | 4.00 |
The option calculation adjusts both the $8 exercise price and $16 average market price to $4 and $8 after the split. Assumed proceeds are $1.566 million; the treasury-stock method therefore adds 104,250 shares, not all 300,000 post-split options.
Order from smallest incremental EPS. The contingent shares, options, and debt remain dilutive as each enters the running computation. The preferred conversion's $4.00 incremental EPS exceeds the running control and is excluded.
diluted numerator = $8,166,955 + $180,000 = $8,346,955
diluted denominator = 2,187,945 + 40,000 + 104,250 + 160,000
= 2,492,195
diluted EPS = $3.35
Basic EPS of $3.73 exceeds diluted EPS of $3.35, but that direction alone is not proof. The release file must retain each candidate's assumptions, incremental ratio, rank, inclusion decision, and numerator-denominator bridge.
Quantitative companions
Choose from 2 ways to work with this calculation.
Verified calculation · earnings per share analysis
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- common dividends distributed
- 360,000
- common share intervals
- 4 fields
Inspect data
{
"april_august": {
"days_outstanding": 153,
"shares_outstanding": 1160000
},
"january_march": {
"days_outstanding": 90,
"shares_outstanding": 960000
},
"november_december": {
"days_outstanding": 61,
"shares_outstanding": 1120000
},
"september_october": {
"days_outstanding": 61,
"shares_outstanding": 1100000
}
}- days in period
- 365
- income from continuing operations
- 8,400,000
- net income
- 8,400,000
- participating securities
- 1 field
Inspect data
{
"unvested_rsus": {
"days_outstanding": 365,
"distributed_earnings": 6000,
"participation_ratio": 1,
"units_outstanding": 15000
}
}- potential common shares
- 4 fields
Inspect data
{
"contingent_shares": {
"average_market_price_per_unit": 0,
"contingency_satisfied": true,
"days_outstanding": 365,
"exercise_price_per_unit": 0,
"kind": "contingent",
"numerator_adjustment": 0,
"other_assumed_proceeds": 0,
"units": 20000
},
"convertible_debt": {
"average_market_price_per_unit": 0,
"contingency_satisfied": true,
"days_outstanding": 365,
"exercise_price_per_unit": 0,
"kind": "convertible",
"numerator_adjustment": 180000,
"other_assumed_proceeds": 0,
"units": 80000
},
"convertible_preferred": {
"average_market_price_per_unit": 0,
"contingency_satisfied": true,
"days_outstanding": 365,
"exercise_price_per_unit": 0,
"kind": "convertible",
"numerator_adjustment": 200000,
"other_assumed_proceeds": 0,
"units": 25000
},
"employee_options": {
"average_market_price_per_unit": 16,
"contingency_satisfied": true,
"days_outstanding": 365,
"exercise_price_per_unit": 8,
"kind": "options_or_warrants",
"numerator_adjustment": 0,
"other_assumed_proceeds": 366000,
"units": 150000
}
}- preferred dividends for period
- 120,000
- retroactive share adjustment factor
- 2
Recomputed result
| Measure | Value |
|---|---|
| basic continuing operations eps | 3.7327 |
| contingent shares incremental shares | 40,000 |
| continuing common numerator | 8,166,954.975 |
| continuing participating security allocation | 113,045.025 |
| convertible debt incremental shares | 160,000 |
| convertible preferred included in diluted eps | 0 |
| convertible preferred incremental shares | 50,000 |
| diluted continuing numerator | 8,346,954.975 |
| diluted continuing operations eps | 3.3492 |
| diluted weighted average shares | 2,492,195.2055 |
| employee options incremental shares | 104,250 |
| weighted average common shares | 2,187,945.2055 |
| weighted participating units | 30,000 |