Definition of Diluted Eps
A diluted eps is the earning per share calculated using the total number of shares outstanding and also the potentially convertible shares. It is often lower than the basic eps that is calculated using the weighted average number of shares. The concept assumes what would be the earnings per share if all the potentially convertible securities are exercised. The convertible securities can include convertible bonds, share options, and warrants.
The formula for diluted EPS is as follow:
Assume a company has after-tax earnings of $50,000 and has 100,000 shares outstanding each trading at $6. The company also has 15000 share options that employees can exercise at $5. The Number of shares that can be converted into shares will be ($5 x 15000 / $6) =12500.
The basic and diluted EPS will be as follows:
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