CFA Level 1: Basic EPS and Diluted EPS False Statements

False Statements about Basic EPS and Diluted EPS

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Question

Which of the following is/are FALSE about Basic EPS and Diluted EPS?

I. Basic EPS excludes anti-dilutive securities but Diluted EPS must include these.

II. Basic EPS ignores instruments like convertible bonds and warrants but Diluted EPS does not.

III. The Treasury stock method, when applied to Basic EPS, compares the average stock price during the period to the strike price in determining conversion.

Answers

Explanations

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A. B. C. D.

B

Note that the questions asks for false statements. (I) is false since both methods exclude anti-dilutive securities from computations. Further, since the Basic EPS ignores all potentially dilutive securities and takes into account only simple capital structure instruments (stocks, bonds, preferred equity), it has no need for the

Treasury Stock method i.e. the Treasury stock method is never used in the computation of Basic EPS.

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