An
annual report of Ford Motor Company states: "Net income a share is
computed based upon the average number of shares of capital stock of all
classes outstanding. Additional shares of common stock may be issued or
delivered in the future on conversion of outstanding convertible debentures,
exercise of outstanding employee stock options, and for payment of defined
supplemental compensation. Had such additional shares been outstanding, net
income a share would have been reduced by 10¢ in the current year and 3¢ in the
previous year. …As a result of capital stock transactions by the company during
the current year (primarily the purchase of Class A Stock from Ford
Foundation), net income a share was increased by 6¢." What information is
provided by this note?
The reader should recognize that there are dilutive
securities outstanding but the overall impact on earnings per share must be
compared to recent and current EPS to be meaningful. In addition, the purchase
of shares enabled the company to increase its earnings per share. The important
point concerning this note is that, apparently, no significant dilution of
present shareholders’ interests will occur if conversion occurs.
