For companies with a complex capital structure,a convertible security is potentially dilutive if its incremental EPS is
A) greater than basic EPS after considering any stock options,rights,and warrants.
B) less than basic EPS after considering any stock options,rights,and warrants.
C) equal to basic EPS after considering any stock options,rights,and warrants.
D) less than 1.00 after considering any stock options,rights,and warrants.

Question

Quizplus · Accepted Answer

If the incremental EPS of a convertible security is less than the basic EPS after considering any stock options, rights, and warrants, then the security is potentially dilutive. This is because the conversion of the security into common stock would increase the number of outstanding shares and decrease the EPS, potentially diluting the value of each share. If the incremental EPS is greater than or equal to the basic EPS, then the security is not potentially dilutive. Choice A and C are incorrect because they assume that a higher EPS would make the security potentially dilutive, which is not the case. Choice D is also incorrect because an EPS less than 1.00 does not necessarily make the security potentially dilutive.

For Companies with a Complex Capital Structure,a Convertible Security Is