The following convertible securities will have a dilutive impact on earnings per share: 1) 10% convertible preferred stock with dividends of $7,000 declared during the year and shares convertible into 2,500 common shares
2) 6% convertible bonds with interest expense net of taxes) of $8,000 and convertible into
3,500 common shares
3) 8% convertible bonds with interest expense net of taxes) of $5,000 and convertible into
1,600 common shares
What is the appropriate ranking of items 1, 2, and 3 above to indicate their impact on diluted earnings per share calculations from most dilutive to least dilutive?

Question

Quizplus · Accepted Answer

Convertible securities are dilutive when they reduce earnings per share upon conversion. The impact on diluted EPS is determined by the number of shares they can be converted into and the cost to the company (dividends for preferred stock, interest net of taxes for bonds). Here, the ranking from most to least dilutive based on the potential increase in common shares and the cost savings (interest or dividends avoided) is: 2) 6% convertible bonds (3,500 shares, $8,000), 1) 10% convertible preferred stock (2,500 shares, $7,000), and 3) 8% convertible bonds (1,600 shares, $5,000).

The Following Convertible Securities Will Have a Dilutive Impact on Earnings