Written Put Options
Written put options and forward purchase contracts require the reporting entity to repurchase shares of its own stock at a predetermined price. These securities are dilutive when the exercise price is above the average market price during the period. Hence, their dilutive effect is computed using the reverse treasury stock method, This procedure is essentially the opposite of the treasury stock method used for call options and warrants.
Under the reverse treasury stock method, it is presumed that the company issues enough common shares at the average market price to generate enough cash to satisfy the contract. It is then assumed that the proceeds from the stock issuance are used to exercise the put (the difference between the number of shares assumed issued and the number of shares that would be received when the put is exercised) are added to the denominator to calculate diluted EPS.
Convertible Securities
Convertible securities are securities (usually bonds or preferred stock) that are convertible into other securities (usually common stock) at a predetermined exchange rate. To determine whether a convertible security is dilutive requires calculation of EPS as if conversion had occurred. The “as-if-converted” figure is then compared to EPS without conversion. If conversion would cause EPS to decline, the security is dilutive. If not, the security would be considered antidilutive, and its pro forma effect of conversion would not be included in diluted EPS.
Written Put Options
Written put options and forward purchase contracts require the reporting entity to repurchase shares of its own stock at a predetermined price. These securities are dilutive when the exercise price is above the average market price during the period. Hence, their dilutive effect is computed using the reverse treasury stock method, This procedure is essentially the opposite of the treasury stock method used for call options and warrants.
Under the reverse treasury stock method, it is presumed that the company issues enough common shares at the average market price to generate enough cash to satisfy the contract. It is then assumed that the proceeds from the stock issuance are used to exercise the put (the difference between the number of shares assumed issued and the number of shares that would be received when the put is exercised) are added to the denominator to calculate diluted EPS.
Convertible Securities
Convertible securities are securities (usually bonds or preferred stock) that are convertible into other securities (usually common stock) at a predetermined exchange rate. To determine whether a convertible security is dilutive requires calculation of EPS as if conversion had occurred. The “as-if-converted” figure is then compared to EPS without conversion. If conversion would cause EPS to decline, the security is dilutive. If not, the security would be considered antidilutive, and its pro forma effect of conversion would not be included in diluted EPS.
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Written Put Options
Written put options and forward purchase contracts require the reporting entity to repurchase shares of its own stock at a predetermined price. These securities are dilutive when the exercise price is above the average market price during the period. Hence, their dilutive effect is computed using the reverse treasury stock method, This procedure is essentially the opposite of the treasury stock method used for call options and warrants.
Under the reverse treasury stock method, it is presumed that the company issues enough common shares at the average market price to generate enough cash to satisfy the contract. It is then assumed that the proceeds from the stock issuance are used to exercise the put (the difference between the number of shares assumed issued and the number of shares that would be received when the put is exercised) are added to the denominator to calculate diluted EPS.
Convertible Securities
Convertible securities are securities (usually bonds or preferred stock) that are convertible into other securities (usually common stock) at a predetermined exchange rate. To determine whether a convertible security is dilutive requires calculation of EPS as if conversion had occurred. The “as-if-converted” figure is then compared to EPS without conversion. If conversion would cause EPS to decline, the security is dilutive. If not, the security would be considered antidilutive, and its pro forma effect of conversion would not be included in diluted EPS.
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