Diluted EPS Calculation

CFA Level I
#1

Hi all,

There is just one aspect of the diluted EPS calculation that keeps tripping me up so I’m hoping someone can help clarify. My understanding is if all potential dilutive securities are actually dilutive then the formula looks something like this…

[(Net Income - Pref Divs) + (Pref Divs) + (1-T)(Convert Bond Int Exp)] / [Weighted Avg Common]

Now the part that keeps screwing me up is WHAT IF the convertable debt is antidilutive. Should I then subtract the after tax interest expense from the numerator and not include the converted shares in the denominator OR do I completely eliminate the convertable bonds from the equation entirely? As in do not add/subtract from numerator and do not convert at all?

Thanks for any feedback, I really need to have this clear for the exam

#2

The latter is correct. If they are antidilutive you ignore them completely (numerator AND denominator).

#3

Thanks, I appreciate it!

#4

You bet.

#5

Of the assets which can be converted to common shares,

  1. Convertible preferred stock

  2. Convertible bond

  3. Warrant

  4. Stock option

(1) and (2) can be potentially anti-dilutive. (3) and (4) are not anti-dilutive from real-world perspective, but possible from exam perspective.

Individually if anti-dilutive, exclude it from overall calculation. Else include it.