Calculation of Diluted EPS (Convertible Preferred Stock)
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We have the following data for a company:
- Net income= $12,000
- Preferred dividend= $2,000
- Weighted Average Shares Outstanding= 10,000
- Convertible Preferred Stock Outstanding = 1,000
Case A: Each share of preferred stock is to be converted into four shares of common stock
Basic EPS = (12,000 – 2,000)/10,000 = 1
The convertible preferred stock should be included in the calculation of diluted EPS only if it is dilutive. To check if it is dilutive, we will divide the preferred dividend by the no. of common shares created from the preferred stock. If this is less that basic EPS, the security is dilutive.
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