When calculating earnings per share (EPS) for firms with complex capital structures, convertible preferred stock is ordinarily considered to be a ______.

A. non-equity security
B. antidilutive security
C. potentially dilutive security

Correct Answer: C

Dilutive securities are securities that decrease EPS if they are exercised or converted to common stock. Stock options, warrants, convertible debt, and convertible preferred stock are examples of potentially dilutive securities. When considering the convertible preferred stock, note that if diluted EPS is greater than basic EPS, the convertible preferred stock would be antidilutive and should not be treated as common stock in computing diluted EPS.