The article describes a decision-tree approach in calculating the earnings per share of a certain company. It is now possible for a company to show four earnings per share figures for a given year: primary earnings per share before extraordinary items, primary earnings per share after extraordinary items, fully diluted earnings per share before extraordinary items, and fully diluted earnings per share after extraordinary items. In teaching the determination of these earnings per share figures, the authors have found a decision-tree approach to be a valuable aid. In the decision trees, it is assumed that the warrants and convertible securities are dilutive. If, however, they are anti-dilutive, i.e., if their inclusion would have the effect of increasing earnings per share or decreasing loss per share, the paths to be taken are those which would be followed had such securities not been in existence. The number of shares issuable upon exercise of the warrants is 500,000 which is less than 20% of the outstanding common shares and, therefore, the path to the right is taken. The authors have found the decision-tree approach to be very useful in teaching earnings per share.

Journal Article Risk and the Optimal Utilization of Capital Get access Kenneth R. Smith Kenneth R. Smith University of Wisconsin, Madison Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 37, Issue 2, April 1970, Pages 253–259, https://doi.org/10.2307/2296417 Published: 01 April 1970 Article history Received: 01 December 1968 Accepted: 01 July 1969 Published: 01 April 1970

I. Debt versus equity financing, 452: Investor portfolio choice, 454; Fundamental leverage theorem, 456; Leverage as an externality 456; Effect of no default risk: the “homemade leverage theorem,” 457; Corporate management and the capital markets, 458; Corporate capital budgets as a “public good,” 460. — II. The corporate investor: long-, margin-, and short-risk positions, 462. — Appendix: option financing, 467.

Presence of a variable market demand function for a given product has significant implications for factor input levels and for the resulting production costs to the firm. In a recent paper, McKean argues that in order to describe the costs of producing a product subject to fluctuating demand it is necessary to take into account the entire distribution of outputs as it relates to the static total cost function. While it is evident that influences on costs and factor inputs will differ in the case of a fluctuating demand schedule compared to the conventional stable demand conditions of classical micro theory, it is not clear that the use of a static cost function in conjunction with a probability distribution of outputs is the proper framework in which to examine the problem.