Which of the following is true for a firm with positive earnings?
A) When bonds are converted into shares of stock, earnings per share increases.
B) When warrants are exercised, earnings per share increases.
C) The number of shares of stock outstanding will decrease with either convertible bonds or warrants.
D) Exercise of warrants and conversion of bonds will always result in a decrease in the price of the stock.
E) Fully diluted earnings per share with either warrants or convertible bonds will be lower than earnings per share based only on shares presently outstanding.

Question

Quizplus · Accepted Answer

Fully diluted earnings per share (EPS) accounts for all potential shares that could be created from convertible bonds, warrants, or other convertible securities. If these are exercised or converted, the number of shares outstanding increases, which typically results in a lower EPS compared to the basic EPS calculated with only the current shares outstanding. This is because the same amount of earnings is spread over a larger number of shares.

Which of the Following Is True for a Firm with Positive