The "if-converted" method for computing earnings per share dilution understates diluted earnings per share when a company's share price is substantially below the conversion price of the debt.

Question

Quizplus · Accepted Answer

If the conversion price of debt is substantially higher than the current share price, it is less likely that the debt will be converted into shares, and therefore, the potential dilution from the debt is not accurately reflected in the if-converted method. As a result, diluted earnings per share may be understated.

The "If-Converted" Method for Computing Earnings Per Share Dilution Understates