A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the following securities would be dilutive?
A.Cumulative 8%, $50 par preferred stock
B.10% convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock
C.7% convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock
D.6%, $100 par cumulative convertible preferred stock, issued at par, with each preferred share convertible into four shares of common stock
I picked D. but it's wrong. The correct answer is C. Dilutive securities reduce earnings per share. To determine dilution, a conversion basis must be stated. Each 7% $1,000 bond yields $49 ($70 – 30% tax) of earnings after tax. The conversion increases the number of shares by 40. The earning per share on the converted bonds is only $1.225 (49/40) thus diluting the basic earnings per share of $1.29.
choice D. 6% $100 per par convertible into 4 shared of common stock yield $6-30% tax = $4.2 / 4 = $1.05. It is lower than C. why isn't D correct?
REG: 77 x2
BEC: 81 x3
FAR: 68 retake 10/1
AUD: 8/27
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