The weak form of the efficient market hypothesis (EMH), discussed in Chapter 4, implies that a random walk model best describes the behavior of common stock prices. Accordingly, the most recent stock price is the best predictor of the future.

Under the treasury stock method, primary EPS and fully dilutive EPS use common stock prices to provide pro-forma information to investors so that they can make predictions about the future and thereby evaluate the firm.

Required:

a. Describe how diluted EPS uses stock prices to provide pro-forma information.

b. Describe how diluted EPS differs from basic EPS.

c. Which form of EPS (primary or fully diluted) provides pro-forma information that is most consistent with the objectives of financial reporting discussed in SFAC No. 1?