To: Brad Dolan, the
stockholder of Rhode Corporation
From: Rhode Corporation, accounting
department Abdullah Alqessir
Date: December 15, 2017
Subject: Response to
warrants not included in the dilutive EPS
I would like to
answer your question “why the warrants are not included in our dilutive earing
per share,” by giving a better understanding about the principle of the
dilutive and antidilutive securities and how the diluted EPS would be
calculated as follow.
Antidilutive Securities are securities that are not common stock in form, but
allow the owner to obtain common stock upon exercise of the securities. FASP
required public firms to disclose basic EPS if the firm has a simple capital
structure with no potential common shares from convertible securities, bonds, warrants,
or options. A firm with potential common shares has a complex capital structure
and required to disclose both basic and diluted EPS. Firms with complex capital
structures will not report diluted EPS if the convertible securities in their
capital structure are antidilutive. Therefore, converted dilutive security will
cause the basic EPS to decrease. Converted antidilutive securities will cause
the basic EPS to increase.
per share is calculated by dividing the net income to the weighted average of
outstanding shares plus diluted convertible securities. I have simplified the
calculation of the EPS into a formula as it shown below:
(NET INCOME $228,000 / WIGHTED AVERAGE OUTSTAND SHARES 100,000
+ DILUTED CONVERTIBLE SECURITY 0).
instruments decrease EPS, while others increase EPS. However, the average price
for the common stock is $25 while the warrants have the right to be exercised
at $30. This mean that the converted warrant is antidilutive and will cause the
EPS to increase. So, if a security after conversion
causes the EPS figure to increase such as the warrants mentioned, it should be
excluded from the calculation of the fully diluted earnings per share.
I hope that I have clarified the
reason of not including the warrant in our diluted earnings per shares. For any
other questions, please don’t hesitate to contact us.