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

Question

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

Quizplus · Accepted Answer

The ranking is based on the impact on diluted EPS, calculated as the interest or dividends saved per share if converted. The 6% bonds save $8,000/3,500 = $2.29 per share, the preferred stock saves $7,000/2,500 = $2.80 per share, and the 8% bonds save $5,000/1,600 = $3.13 per share. Lower savings per share have a higher dilutive effect, so the order is 2, 1, 3.

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