Question

Investors tend to focus on the bottom line when conducting financial analyses. Thus far, you have calculated earning; per share (EPS) as the net income available to common shareholders divided by the number of common shares outstanding. However, when firms use a lot of hybrid securities, their earnings can be distorted. As a result, a few different methods exist for reporting EPS. Primary EPS is the EPS found after adjusting for the number of shares that are likely to be issued from convertibles and warrants.
Read the following statement, which describes one of these reporting methods:
Earnings per share are found based on the assumption that all convertibles and warrants are exercised rather than trying to estimate how many of them are likely to be exercised. Identify which of the reporting methods this statement describes:
A. Diluted EPS.
B. Basic EPS.
C. Primary EPS.

Answer 1

Answer:

The reporting method described by the statement is:

A. Diluted EPS.

Explanation:

Diluted EPS gauges the quality of a company's earnings per share (EPS) as if all convertible securities were exercised.  Convertible securities include the company's outstanding convertible preferred shares, convertible debentures, stock options, and warrants.  The diluted EPS is different from the basic EPS (otherwise called the Primary EPS).  The basic EPS measures the company's earnings per common share without considering any outstanding convertible securities.