Are We in Trouble or Not?
Tolman Yacht Company has just completed its determination of EPS for the year. As a result of issuing convertible securities during the year, Tolman’s capital structure is now defined as being complex. The basic EPS for this year is $2.90, but the diluted EPS is only $2.50; both figures are down from the prior year’s $3.25 basic EPS figure. Sung Wong and Martha Chou, two stockholders, have received their financial statements from Tolman and are discussing the EPS figures over lunch. The following dialogue ensues.
Wong: “I guess Tolman must be having trouble. I see its earnings per share is down significantly.”
Chou: “Maybe so, but this year there are two figures, where before there was only one.”
Wong: “Something to do with the convertible bonds and preferred stock issued during the year making it a complex capital structure. But both of the earnings per share figures are lower than the single figure the year before.”
Chou: “That’s true. But income for the current year is higher than last year. I’m confused.”
Enlighten the stockholders.