Question

Discuss the concept of simple vs. complex capital structures and how it relates to the reporting of earnings per share.

Answer 1

A simple capital structure involves equity shares, non convertible preference shares and non convertible bonds. A simple capital structure means that there is no risk of equity dilution in future leading to less diluted earnings per share. Here the basic and diluted earning per share are similar.

A complex capital structure involves convertible preference shares or convertible bonds and the like implying that in future the preference shares and bonds will be converted into equity shares as per the agreement. Here there is a difference between basic earning per share and diluted earning per share. The diluted earning per share reflects the earnings on the equity portion of convertible preference shares and convertible bonds.