You are correct, Mr. Imho. There was an extra zero to the right of the decimal point in my EPS calculation but it is not germane to the argument that EPS ought to be zero when there is no increase in economic value on a per-share basis (as was the case in the example).
A major problem with GAAP is that it overstates EPS by ignoring share expansion in the EPS numerator (even though it takes share expansion into account in the EPS denominator).
(Technically, GAAP EPS is calculated using a denominator based on a weighted average number of diluted shares during the period in question. So in my prior example, the correct denominator for the first year of the sample company is 102.5M shares, the average of 100M and 105M. Then $50M/102.5M gives an EPS of $0.49. The key point, of course, is that any non-zero value for GAAP EPS in this example is misguided.)
BTW: if you haven’t read message #4408, please do so. For me, it’s the clearest indication of how misleading GAAP EPS numbers can be when there is expansion in the share count due to options. Regards, Dew
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