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Anti Dilutive Securities | Definition | Formula | Calculation - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
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clicking the bell icon friends today we have topic which is Anti Dilutive of
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securities
the most important part for any company
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because you know Anti Dilutive securities
they reduce the earning per share see
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I've taken in call as the extract of the
Colgate-Palmolive company as you can see
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over here there's a two type of EPS one
is the basic EPS and another is the
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diluted EPS so what exactly there's a
difference see for the basic EPS there
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is no anti dilutive securities which
results in reduction of the EPS but in
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case of the Anti Dilutive EPS they lead to
the dilution of a companies earning
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per share and why does that lead why
does that thing happen because they are
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Dilutive in nature they have an
option to convert in the future okay we
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have to get into the nitty-gritty of
this topic before we make some cheer
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conclusion at the beginning so the basic
earning per share the B EPS of
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the company is always there that has to
be always higher than the DEP is that is
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diluted earning per share let us have a
look at the north east nap shot over
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here or the colgets EPS we know what
we know that you know the diluted EPS
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over here 2.38 years
the diluted or earning per share is more
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than the the earning per share are the
solid the diluted EPS over here
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2.38 it is less than the BPS here
it is less here it is less right so what
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are the Anti dilutive securities well the
anti-derivative securities are are those
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dilutive securities that results in the
higher dilutive earning per share
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in such a case we wouldn't use that
security in our calculation of the
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diluted earning per share so at the
beginning what I told you that I know it
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results in reduction no actually
Anti dilutive is the one which which
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increases which does not decrease but it
increases the dilutive earning per share so
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that's why it has NT dilute if it's not
tell you to its NT relative and let's
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take an example to illustrate the to
illustrate you know how the Anti diluted
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security works and how to our treat and
the Anti dilutive security while
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calculating the diluted EPS now let's
say there is a company are that has
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issued a convertible bond or for let's
say at $200 per share $200 par value
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issue at par of the total let's say
50,000 which is
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yielding
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let's say 15% now company R has
mentioned that it on each born let's say
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our company our has mentioned that you
know each bond can be converted into
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let's say 20 shares into common stock so
the weighted average or outstanding
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number of the common shares is let's say
16,000 so the net income of the company
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are for the year is let's say standing
at $20,000 and the paid preference
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dividend that PD is let's say $4,000
tax rate let's say amounts to 25%
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so what we need to do is we need to find
the basic EPS and Anti dilutive EPS
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you need to compare the tubes in the
above example the first we will
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calculate is the EPS and the dilutive
EPS right well the earning per share is
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going to be the net income the that is
the EPS is going to be or we say the net
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income minus any preference dividend
divided by the average number of common
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shares
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well or the basic EPS over here has to
be from the details 30000-
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4000/16000 so that there should be in the
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bracket so that so it comes down to $1 per share not to compute the
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diluted EPS here first of all will
calculate the number of the common
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shares that would be converted from the
convertible bond and in this situation
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for each of the convertible bond there
are 40 common shares right that would
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be issued now if we convert all of this
convertible bond into common shares we
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would get something like this
250 as you can see over here into
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200 right into 0.15 into 1 bracket
because it we are for tax 1 minus 0.25
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the tax it is so post tax that will
give us 5625 so now we will
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calculate the diluted EPS of the
company are the diluted EPS will be net
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income less the net income
minus the preferred dividend
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when is the PD right and what we need to
add over here is the earning of the
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convertible bond divided by any weighted
average convertible number of the common
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shares plus the convertible or the
convert converted common shares from the
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convertible bond so let's get down to
the numbers here quickly it's gonna be
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20000-4000+5625 and this will be
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divided by 16,000 that is the total
number of shares plus there will be
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dilutive securities then it is going to
be 5000 so the total answer is
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going to be 1.03 so
that's gonna be your dilutive earning
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per share well in the above example what
we saw that you know the convertible
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bonds they are Anti dilutive of in
nature this is this was basic and
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diluted is coming 1.02 so
this convertible shares are increasing
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the EPS and not decreasing so when when
they when any increase in their EPS it's
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it is considered not dilutive it is
considered empty relative right so
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that's the call over here when a company
has anti relative security like this in
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this particular example it excludes the
anti derivative securities from the
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calculation of the relative earning per
share okay now how to check if the
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convertible preferred stock is Anti dilutive you to security or not so to
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check whether you know the convertible
preferred stock is Anti dilutive we
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need to calculate the convertible
preferred dividend divided by the
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convertible preference shares so if the
ratio over here this ratio is let's say
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if it is less than the basic that is bps
a convertible preferred stock is
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dilutive in nature and should be
included in the calculation of the
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dilutive eps now if the ratio over here
this particular thing if that is greater
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than the basic EPS that is the bps then
the convertible preferred stock is nt
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dilutive now how to check over here
if the convertible debt
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is there any value to security or not so
before calculating the dilutive eps ones
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to check if the security is NT dilutive
or not so to check whether the
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convertible debt is an antiderivative or
not you can you can calculate something
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like this the convertible or debt
interest into what we see 1 minus the
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tax rate divided by the convertible
shares
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okay convertible what we call as the
debts shares
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so if the ratio is over here with the
ratio if it is less than the BEPS the
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basic earning per share the convertible
debt is as you can see the dilutive
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security and should should be included
in the calculation of the diluted EPS
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now if the ratio over here if that is a
greater than the bps then the
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convertible debt is dilutive it is nt
dilutive in nature so that's it for so
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that's it for the Anti dilutive to
security Anti dilutive shares so that's it
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