- CFA Exams
- CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 21. Understanding Income Statements
- Subject 7. Earnings per Share
CFA Practice Question
How will dilutive securities affect a firm's diluted earnings per share (EPS)?
A. They will lower EPS.
B. They will neither raise nor lower EPS.
C. They will either lower or raise EPS depending upon whether the security is dilutive or antidilutive.
Explanation: Dilutive securities such as convertibles and options are found in complex capital structures and always lower EPS. Convertibles and options may also be antidilutive, which will raise EPS (hence the name antidilutive). The only way to know if a security is dilutive or antidilutive is to compare basic EPS to diluted EPS. If diluted EPS is higher than basic EPS then the security is antidilutive and should not be included when determining diluted EPS.
User Contributed Comments 6
| User | Comment |
|---|---|
| prachirp | The last choice is for dilutive AND antidilutive securities. |
| zed888 | trick question - was only referring to the impact of dilutive securities ! |
| kritan | the question is tautological: the diluted EPS is already diluted... |
| cfastudypl | The question is not tautological but rather asking for the clear effect of dilutive security. Option A is perfectly correct while option C is meant to tempt you to pick the wrong choice. |
| tapasp | Agree with Kritan ! |
| Patdotcom | That is, The question is not well formulated as it asks for the effect in diluted EPS and not in basic EPS. the diluted EPS already considered the dilution. The answer should be reviewed |