Abstract The article describes a decision-tree approach in calculating the earnings per share of a certain company. It is now possible for a company to show four earnings per share figures for a given year: primary earnings per share before extraordinary items, primary earnings per share after extraordinary items, fully diluted earnings per share before extraordinary items, and fully diluted earnings per share after extraordinary items. In teaching the determination of these earnings per share figures, the authors have found a decision-tree approach to be a valuable aid. In the decision trees, it is assumed that the warrants and convertible securities are dilutive. If, however, they are anti-dilutive, i.e., if their inclusion would have the effect of increasing earnings per share or decreasing loss per share, the paths to be taken are those which would be followed had such securities not been in existence. The number of shares issuable upon exercise of the warrants is 500,000 which is less than 20% of the outstanding common shares and, therefore, the path to the right is taken. The authors have found the decision-tree approach to be very useful in teaching earnings per share.
Bird et al. (Thu,) studied this question.
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