Although primary EPS is less than simple EPS, and fully diluted EPS is less than primary EPS, additional testing must be done to assure that maximum dilution has occurred. If there are any anti-dilutive securities, they should be excluded from the calculations.

## Primary EPS

The only potentially anti-dilutive securities affecting the calculation of primary EPS are the bonds. The interest savings per issuable common share are $1.04, which was found by dividing the total savings ($62,400) by the number of issuable shares (60,000). This result is far below primary EPS without it ($1.68). This second number was found by dividing the earnings adjusted for preferred dividends ($2,005,000) by 1,191,726 (the number of outstanding shares plus the net number issuable from the warrants). Thus, the bonds are dilutive for primary EPS.

## Fully diluted EPS

The identification of anti-dilutive effects in fully diluted EPS is more complicated because there are three factors to be considered (bonds, preferred stock, and the contingent issuance agreement). The first phase is theĀ calculation of the additional earnings per issuable share of each of them. These results are shown below:

The EPS result before considering these factors is $1.68, which is found by dividing the adjusted reported income by the number of outstanding shares plus shares issuable from the warrants (1,194,117) as shown in below example. Thus, none of the three is obviously anti-dilutive and the next phase must be performed.

At this stage, each security is included in the calculation in order of most to least dilutive. The first step includes the bonds. The numerator equals the $2,005,000 seen above plus $62,400 of interest savings. The denominator is the 1,194,117 seen above plus 60,000 shares. The result is $1.65 per share, as shown in the second column of the above example.

At the next step, the preferred dividends saving per share ($1.13) is seen to be dilutive of the $1.65 EPS from step 1. Thus, it should be included. The calculations are shown in the third column of the above example. The numerator is not adjusted for preferred dividends paid and the denominator is increased by the 150,000 shares of common that would be issued. The result is $1.59 per share.

The third step is the comparison of this result with the additional EPS provided by the contingent agreement ($1.65). Because its effect per share is greater than $1.59, the agreement is anti-dilutive, and it should be omitted. As confirmation, observe that the $1.59 is lower than the preliminary result of $1.60 seen in the above example.

### Materiality test

Before determining what EPS disclosures are to be provided, these preliminary results must be tested for the materiality of the dilution. The test shows that fully diluted EPS ($1.59) is only 93 percent of simple EPS ($1.71). Therefore, the Example Company must report both primary and fully diluted EPS