- 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
When calculating earnings per share (EPS) for firms with complex capital structures, convertible bonds are ordinarily considered to be ______.
B. antidilutive securities
C. embedded debt securities
A. potentially dilutive securities
B. antidilutive securities
C. embedded debt securities
Correct Answer: A
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 bonds, note that if diluted EPS is greater than basic EPS, the convertible bonds would be antidilutive and should not be treated as common stock in computing diluted EPS.
User Contributed Comments 3
| User | Comment |
|---|---|
| kalps | If diluted EPS > Basic EPS then the convertible bond is antidilutive and should not be considered as common stock in computing the diluted EPS |
| Saxonomy | In English... if diluted EPS > basic EPS, then use basic EPS. |
| Seancfa1 | Thank-you Saxonomy^ :-) |