Page 34 - FINAL CFA I SLIDES JUNE 2019 DAY 7

Session Unit 7:

24. Understanding Income Statements

Example 4: EPS with convertible bonds, convertible preferred, and options, p.65
During 20X6, ZZZ reported net income of $115,600 and had 200,000 shares of common stock outstanding for the
entire year. ZZZ had 1,000 shares of 10%, $100 par convertible preferred stock, convertible into 40 shares each,
outstanding for the entire year. ZZZ also had 600, 7%, $1,000 par value convertible bonds, convertible into 100
shares each, outstanding for the entire year. Finally, ZZZ had 10,000 stock options outstanding during the year. Each
option is convertible into one share of stock at $15 per share. The average market price of the stock for the year was
$20. What are ZZZ’s basic and diluted EPS? (Assume a 40% tax rate.)

Step 1: From Examples 1, 2, and 3, we know that the convertible preferred stock, convertible
tanties
bonds, and stock options are all dilutive. Recall that basic EPS was calculated as:

Step 2: Review the no. of shares created by

converting the convertible securities and
options

Step 4: Compute ZZZ’s diluted EPS

What if it was not lower?

Its antidilutive =Basic = dilutive EPS!