S. Earnings Per Share

Basic earnings per share (EPS) amounts are computed by dividing earnings, after the deduction of preferred stock dividends declared and dividends and undistributed earnings allocated to participating securities, by the average number of common shares outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive share equivalents outstanding not classified as participating securities.

The information used to compute basic and diluted EPS attributable to Alcoa common shareholders was as follows (shares in millions):


	2012		2011		2010
Income from continuing operations attributable to Alcoa common shareholders	$	191	$	614	$	262
Less: preferred stock dividends declared		2		2		2
Income from continuing operations available to common equity		189		612		260
Less: dividends and undistributed earnings allocated to participating securities		-		1		1
Income from continuing operations available to Alcoa common shareholders—basic		189		611		259
Add: interest expense related to convertible notes		-		30		-
Income from continuing operations available to Alcoa common shareholders—diluted	$	189	$	641	$	259
Average shares outstanding—basic		1,067		1,061		1,018
Effect of dilutive securities:
Stock options		3		7		6
Stock and performance awards		6		4		1
Convertible notes		-		89		-
Average shares outstanding—diluted		1,076		1,161		1,025

Participating securities are defined as unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) and are included in the computation of earnings per share pursuant to the two-class method. Prior to January 1, 2010, under Alcoa’s stock-based compensation programs, certain employees were granted stock and performance awards, which entitle those employees to receive nonforfeitable dividends during the vesting period on a basis equivalent to the dividends paid to holders of Alcoa’s common stock. As such, these unvested stock and performance awards met the definition of a participating security. Under the two-class method, all earnings, whether distributed or undistributed, are allocated to each class of common stock and participating securities based on their respective rights to receive dividends. At December 31, 2012, there were no outstanding participating securities, as all such securities have vested and were converted into shares of common stock. At December 31, 2011 and 2010 there were 2 million and 4 million participating securities outstanding, respectively.

Effective January 1, 2010, new grants of stock and performance awards do not contain a nonforfeitable right to dividends during the vesting period. As a result, an employee will forfeit the right to dividends accrued on unvested awards if that person does not fulfill their service requirement during the vesting period. As such, these awards are not treated as participating securities in the EPS calculation as the employees do not have equivalent dividend rights as common shareholders. These awards are included in the EPS calculation utilizing the treasury stock method similar to stock options. At December 31, 2012, 2011, and 2010, there were 12 million, 8 million, and 4 million such awards outstanding, respectively.

In 2012 and 2010, 89 million share equivalents related to convertible notes were not included in the computation of diluted EPS because their effect was anti-dilutive.

Options to purchase 27 million, 27 million, and 23 million shares of common stock at a weighted average exercise price of $15.41, $24.00, and $32.73 per share were outstanding as of December 31, 2012, 2011, and 2010, respectively, but were not included in the computation of diluted EPS because they were anti-dilutive, as the exercise prices of the options were greater than the average market price of Alcoa’s common stock.