- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 2. Analyzing Income Statements
- Subject 5. Earnings per Share
CFA Practice Question
A firm with a capital structure made up of common stock and non-convertible bonds is said to have a ______.
B. conventional capital structure
C. simple capital structure
A. non-diluted capital structure
B. conventional capital structure
C. simple capital structure
Correct Answer: C
A simple capital structure is one that contains no securities with the potential to dilute a firm's earnings per share. For example, convertible bonds, convertible preferred stock, options, and warrants have the potential to dilute earnings per share upon conversion or exercise.
User Contributed Comments 4
| User | Comment |
|---|---|
| jpducros | I've seen questions where convertible-bond are still considered simple structure, while Warrant is definitely a sign of a complex structure. Not sure why however. |
| Xiangrong | Maybe it's because convertible-bonds are not always dilutive, ie. when the option is OOM, it's like a normal bond. |
| ascruggs92 | The Key between simple and complex is the prospect of dilution. If the bonds are not convertible for whatever reason within the current period, there is no potential of dilution and the company is said to have a simple structure until terms of conversion are met |
| Freddie33 | 40 questions... kill me now |