So now we're going to talk about diluted EPS.

So companies with complex capital structures also have to

report something called diluted EPS.

As it turns out, almost every company has one of these instruments.

So almost every company reports diluted EPS.

And it turns out that diluted EPS is the number that

most people focus on rather than basic EPS.

So what does a complex capital structure mean?

It means that there's securities that can be converted into shares of

common stock at the investor's discretion.

So this would include things like convertible debt.

So an investor holds debt, but

they have the option to convert that into shares of stock.

Or stock options and warrants.

Warrant is another form of stock option, but this gives the holder of the option or

the warrant the ability to convert that into new shares of stock.

Now, some of the value of these convertible securities is tied to

the value of the common stock.

You know, basically you, you get a stock option or

you get convertible debt and part of the price of getting that

incorporates the price of the common stock because there's this option to convert.

So in a sense, the investors holding these securities are like indirect stockholders.

And we really should count them as at least

some fraction of the common shareholders at the time we do the EPS calculation.

So what diluted EPS is going to do is give you an EPS number assuming that everything

that could convert to a share of stock actually did convert to a share of stock.

So the definition's going to be take net income minus preferred dividends, but

then add an adjustment for

convertibles, what would happen if they converted to common stock.

And then in the denominator, we'll take the weighted average common shares

outstanding, and again adjust for the effect of these convertibles.

Assuming that everything could convert would actually do so.