Question from practice exam:
McLoone Company's basic earnings per share is $1.20. McLoone has $10 million par value of 5% preference shares outstanding that can be converted into 400,000 common shares. Is McLoone required to report dilutive earnings per share?
A. Yes, because the preference shares are dilutive to EPS.
B. No, because the preference shares are not dilutive to EPS.
C. Yes, because the preference shares are potentially dilutive to EPS.
Answer being: Diluted EPS must be reported if a firm has any potentially dilutive securities outstanding. In this case, the security is antidilutive ($500,000 / 400,000 = $1.25, which is greater than basic EPS), and the firm will report that diluted EPS is equal to basic EPS.
Can someone explain this? The answer says that the security is antidilutive. So why does the correct answer become C?
McLoone Company's basic earnings per share is $1.20. McLoone has $10 million par value of 5% preference shares outstanding that can be converted into 400,000 common shares. Is McLoone required to report dilutive earnings per share?
A. Yes, because the preference shares are dilutive to EPS.
B. No, because the preference shares are not dilutive to EPS.
C. Yes, because the preference shares are potentially dilutive to EPS.
Answer being: Diluted EPS must be reported if a firm has any potentially dilutive securities outstanding. In this case, the security is antidilutive ($500,000 / 400,000 = $1.25, which is greater than basic EPS), and the firm will report that diluted EPS is equal to basic EPS.
Can someone explain this? The answer says that the security is antidilutive. So why does the correct answer become C?