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Finance: What is Fully Diluted EPS? 1 Views


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What is a Fully Diluted EPS? Fully Diluted EPS refers to the event that all convertible shares of a company are exercised. Convertible shares include bonds and options, including employee options. The Fully Diluted EPS refers to all shares being sold and the dollars earned per share decreasing because the number of outstanding shares has decreased so much.

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Transcript

00:00

Finance allah shmoop What is fully diluted e p s

00:06

or earnings per share All right This is the company

00:11

headquarters for beef in a can the meat industry's answer

00:15

too easy cheese Okay so the earnings number came in

00:18

just fine at a dollar Twelve a share It's about

00:21

what wall street was expecting But then why did the

00:24

stock sell off so hard in the aftermarket the stock

00:27

was thirty five Fifty two with the close And now

00:29

it's only thirty three Twenty Not a huge break but

00:33

well about six ish percent is six ish percent So

00:36

what gives Well the primary earnings number was good It

00:41

beat street expectations of a buck ten But the fully

00:44

diluted earnings per share Well it sucked Why Well because

00:50

the company had granted too many stock options to its

00:53

employees There's a super competitive environment in silicon valley Teo

00:57

higher beef engineers So yes in very wall street E

01:01

Irony The company in trying to be generous with its

01:05

employees and be competitive Well it killed their stock Where's

01:09

the beef indeed Well those stock option grants were in

01:12

fact recognized by investors and those quote generous grants unquote

01:17

Ended up costing the employees well two bucks a share

01:20

and all the shareholders lost meaningful money is the stock

01:23

price sagged We'll have that work What happened Well there

01:27

are primary shares that comprise the base of a company's

01:31

ownership They are the common shares of the company and

01:34

actually owned that is they aren't just options So beef

01:38

in a can has one hundred million shares outstanding of

01:41

common shares common stock But it surprised wall street tto

01:45

learn that the company now also had twelve million options

01:49

outstanding and is the company earned one hundred twelve million

01:52

dollars then yes it had net income or earnings per

01:56

share of a dollar twelve on their primary earning things

02:00

but they're fully diluted Earnings are divided by the hundred

02:03

million common plus the twelve million options And that calculation

02:08

is made by dividing one hundred twelve million in earnings

02:10

then divided by the conveniently numbered here for this problem

02:14

one hundred twelve million fully diluted shares and options to

02:17

get only a dollar a share info fully diluted e

02:21

p s Well why is that such a problem Well

02:24

dilution is a bad thing if you're an already owning

02:27

owner of a company Your ownership i gets spread out

02:32

over more and more mouths That's gotta feed and well

02:35

you get less fat So when wall street sold off

02:38

the stock in this earning surprise the actual printed number

02:41

was just fine It was the denominator the total dilution

02:45

of option grants Well that's what feed up the stock

02:48

and yeah if you're the ceo of this company you 00:02:51.11 --> [endTime] might have a beef with that

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