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Why do companies make preferred stocks and bonds convertible?
It increases the marketability of the securities
When a bond or preferred stock is converted, it creates more shares of common stock and is called "dilutive"
Indicates the income earned by each share of common stock
Earnings per share (EPS)
Can be calculated for each component of income
Capital structure that only has common stock
Simple capital structure
Capital structure that has potentially dilutive securities such as convertible securities, options, warrants or other rights
Formula for EPS
EPS= (Net income less preferred dividends) / weighted average # of shares outstanding
Formula for diluted EPS
NI less pref dividends + Bond Int expense (1-tax rate)
weighted average # of o/s + c/s equivalent + options + warrants
Formula for determining the c/s equivalent of stock options
(Mkt price - Exercise price)/Mkt price
the # of stock options
If it is a negative #, no one will exercise the option
How do you determine if a security is antidilutive?
Calculate basic EPS
Calculate diluted EPS assuming the security is converted
If diluted EPS > basic EPS, the security is antidilutive
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