A firm has convertible bonds, preferred equity, common equity and straight bonds in its capital structure. In calculating Diluted EPS, which of the following is true about the earnings number used, assuming the convertible bonds are dilutive?
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A. B. C. D.D
Think of the earnings used in EPS calculations as the earnings that are available for distribution amongst common shareholders. Under Diluted EPS, convertible bonds are assumed converted if dilutive. Hence, for Diluted EPS purposes, convertible bond holders are assumed to be a part of the residual claimants of the earnings available after the liabilities to debt holders and preferred equity holders are satisfied. The earnings available for distribution amongst these security holders then equal Net income - preferred dividends + interest payments on convertible net of taxes.