Given the following convertible securities, determine the appropriate ranking to determine their impact on diluted earnings per share calculations:

Question

Quizplus · Accepted Answer

Convertible securities are ranked by their dilutive effect, with the most dilutive securities being accounted for first. Therefore, the appropriate ranking would be: 
1) Convertible bonds - These are typically the most dilutive as they have a fixed conversion ratio and can result in a large number of additional shares being issued. 
2) Convertible preferred stock - These have a fixed conversion ratio like convertible bonds, but are typically less dilutive as they have a higher liquidation preference. 
3) Stock options - These have a variable conversion ratio and are typically less dilutive than convertible securities as they only result in additional shares being issued if the holder exercises the option. Therefore, the ranking is 2, 1, 3.

Given the Following Convertible Securities, Determine the Appropriate Ranking to Determine