Week 7 Discusion 1

1)  Let’s start by defining the following terms.

   a.  Basic earnings per share.

   b.  Potentially dilutive security.

    c. Diluted earnings per share.

    d. Complex capital structure.

    e. Potential common stock.

2)  Why are preferred dividends deducted from net income when calculating EPS? Are there circumstances when this deduction is not made? 

Answer– 

Preferred stock holders have a priority in receiving dividends before common stock holders. Also, preferred stock holders usually get a fixed rate of dividend every year irrespective of company’s profits. Due to this reason, we need to deduct preferred dividends from net income when calculating Basic EPS. 

 This deduction is not made when we calculate Diluted EPS in case of convertible preferred stock. However, this increases the denominator (since weighted outstanding diluted common shares will also include convertible preferred shares).

References: https://budgeting.thenest.com/preferred-stock-usually-pay-fixed-dividend-28647.html (Links to an external site.) 

Instructions

write a answer for question no 1 and for 2 peer review.