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Example: 800,000 8% convertible cumulative preference shares of $1 each. Each preference share is convertible into 2 ordinary shares.
The solution says that to calculate the diluted EPS, the convertible preference shares are ignored as they increase the diluted EPS and are regarded as anti-dilutive.
Could you please explain better? I didn’t get the point. Thanks
I need more information from you, but this should help
On conversion we no longer have to pay a preference dividend so our potential extra earnings are $64,000 (8% x $800,000)
On conversion there will be an additional 1,600,000 equity shares
The marginal earnings per share for this extra issue will be $64,000 / 1,600,000 = 4 cents per share
The further information that would have helped is the earnings per share before this preference share conversion but I assume that those earnings were less than 4 cents per share
So the conversion improves the overall earnings per share … but that is NOT what our potential global investor (pgi) wants to know.
The pgi wants to know what is the WORST position wrt earnings per share … for example, what if the preference share holders choose not to convert
OK?
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