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clicking the bell icon friends today we have topic which is Anti Dilutive of
securities
the most important part for any company
because you know Anti Dilutive securities
they reduce the earning per share see
I've taken in call as the extract of the
Colgate-Palmolive company as you can see
over here there's a two type of EPS one
is the basic EPS and another is the
diluted EPS so what exactly there's a
difference see for the basic EPS there
is no anti dilutive securities which
results in reduction of the EPS but in
case of the Anti Dilutive EPS they lead to
the dilution of a companies earning
per share and why does that lead why
does that thing happen because they are
Dilutive in nature they have an
option to convert in the future okay we
have to get into the nitty-gritty of
this topic before we make some cheer
conclusion at the beginning so the basic
earning per share the B EPS of
the company is always there that has to
be always higher than the DEP is that is
diluted earning per share let us have a
look at the north east nap shot over
here or the colgets EPS we know what
we know that you know the diluted EPS
over here 2.38 years
the diluted or earning per share is more
than the the earning per share are the
solid the diluted EPS over here
2.38 it is less than the BPS here
it is less here it is less right so what
are the Anti dilutive securities well the
anti-derivative securities are are those
dilutive securities that results in the
higher dilutive earning per share
in such a case we wouldn't use that
security in our calculation of the
diluted earning per share so at the
beginning what I told you that I know it
results in reduction no actually
Anti dilutive is the one which which
increases which does not decrease but it
increases the dilutive earning per share so
that's why it has NT dilute if it's not
tell you to its NT relative and let's
take an example to illustrate the to
illustrate you know how the Anti diluted
security works and how to our treat and
the Anti dilutive security while
calculating the diluted EPS now let's
say there is a company are that has
issued a convertible bond or for let's
say at $200 per share $200 par value
issue at par of the total let's say
50,000 which is
yielding
let's say 15% now company R has
mentioned that it on each born let's say
our company our has mentioned that you
know each bond can be converted into
let's say 20 shares into common stock so
the weighted average or outstanding
number of the common shares is let's say
16,000 so the net income of the company
are for the year is let's say standing
at $20,000 and the paid preference
dividend that PD is let's say $4,000
tax rate let's say amounts to 25%
so what we need to do is we need to find
the basic EPS and Anti dilutive EPS
you need to compare the tubes in the
above example the first we will
calculate is the EPS and the dilutive
EPS right well the earning per share is
going to be the net income the that is
the EPS is going to be or we say the net
income minus any preference dividend
divided by the average number of common
shares
well or the basic EPS over here has to
be from the details 30000-
4000/16000 so that there should be in the
bracket so that so it comes down to $1 per share not to compute the
diluted EPS here first of all will
calculate the number of the common
shares that would be converted from the
convertible bond and in this situation
for each of the convertible bond there
are 40 common shares right that would
be issued now if we convert all of this
convertible bond into common shares we
would get something like this
250 as you can see over here into
200 right into 0.15 into 1 bracket
because it we are for tax 1 minus 0.25
the tax it is so post tax that will
give us 5625 so now we will
calculate the diluted EPS of the
company are the diluted EPS will be net
income less the net income
minus the preferred dividend
when is the PD right and what we need to
add over here is the earning of the
convertible bond divided by any weighted
average convertible number of the common
shares plus the convertible or the
convert converted common shares from the
convertible bond so let's get down to
the numbers here quickly it's gonna be
20000-4000+5625 and this will be
divided by 16,000 that is the total
number of shares plus there will be
dilutive securities then it is going to
be 5000 so the total answer is
going to be 1.03 so
that's gonna be your dilutive earning
per share well in the above example what
we saw that you know the convertible
bonds they are Anti dilutive of in
nature this is this was basic and
diluted is coming 1.02 so
this convertible shares are increasing
the EPS and not decreasing so when when
they when any increase in their EPS it's
it is considered not dilutive it is
considered empty relative right so
that's the call over here when a company
has anti relative security like this in
this particular example it excludes the
anti derivative securities from the
calculation of the relative earning per
share okay now how to check if the
convertible preferred stock is Anti dilutive you to security or not so to
check whether you know the convertible
preferred stock is Anti dilutive we
need to calculate the convertible
preferred dividend divided by the
convertible preference shares so if the
ratio over here this ratio is let's say
if it is less than the basic that is bps
a convertible preferred stock is
dilutive in nature and should be
included in the calculation of the
dilutive eps now if the ratio over here
this particular thing if that is greater
than the basic EPS that is the bps then
the convertible preferred stock is nt
dilutive now how to check over here
if the convertible debt
is there any value to security or not so
before calculating the dilutive eps ones
to check if the security is NT dilutive
or not so to check whether the
convertible debt is an antiderivative or
not you can you can calculate something
like this the convertible or debt
interest into what we see 1 minus the
tax rate divided by the convertible
shares
okay convertible what we call as the
debts shares
so if the ratio is over here with the
ratio if it is less than the BEPS the
basic earning per share the convertible
debt is as you can see the dilutive
security and should should be included
in the calculation of the diluted EPS
now if the ratio over here if that is a
greater than the bps then the
convertible debt is dilutive it is nt
dilutive in nature so that's it for so
that's it for the Anti dilutive to
security Anti dilutive shares so that's it
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