[MRSJLeon917]

I am taking FAR on Monday (and completely freaking out!!) and am having trouble on one specific topic. When calculating Diluted EPS, I can’t seem to understand how to determine if securities are dilutive or antidilutive for inclusion in the denominator of the calculation. Can someone explain this to me in plain English? I don’t know why I just can’t seem to understand this. Any help is greatly appreciated!

AUD (5/25/2012): 91
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BEC (01/05/2013): 82
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IL Licensed CPA - 7/15/2013

A long journey, officially DONE!

[Anonymous]

Convertible Bonds = 1000 Bonds will get you 5 shares of common stock. If they are converted:

Denominator = 1000*5 = 5000 additional shares outstanding .

Numerator = Interest Expense * (1-Tax rate) = This would be interest saved from the conversion of debt to equity so it is added to Income

Convertible Preferred Stock = If they are converted add it to Common Shares outstanding. 1000 Shares of PS converted will give you 5 shares of common stock.

Denominator = 1000*5 = 5000 additional shares outstanding

Numerator = Do not include dividends because if the PS are converted they will not pay have to pay the dividends.

Options, Warrants – Treasury Stock method.

Dilutive – They will dilute/reduce EPS so include it.

Anti-Dilutive – They will not be converted and will not reduce EPS do not include it.

Include if they are Dilutive to EPS (Strike price < Average Price). If you had a stock option that you can exercise for $5 and the market price for the stock is $10 they are in the money, so these are anti-dilutive. Someone can exercise an option for $5 and its worth $10 in the market.

If you had an option that you can exercise for 10$, but the average price for the share is $5 these would never be converted because it is a waste they have no value. They are anti-dilutive because they will never be converted and wont reduce EPS so they are out of the money.

[Author]

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