Anti-Dilutive Security

Does anyone have an example of an anti dilutive security? (A security that causes an increase in EPS when exercised)

There are anti-dilution provisions in lots of convertible securities that make them maybe anti-dilutive but the classic example is convertible preferred stock which may be either dilutive or anti-dilutive. So lets say that there are 100,000 shares of common and 100,000 shares of convertible preferred each convertible into 1 share of common. EPS = \$1 without conversion. Dividends on preferred = \$1.50 EPS after conversion = (100K + 150K)/200K = \$1.25 EPS without conversion = \$1 Thus the convertible preferred is antidilutive.

there are a lot of examples with bonds convertible and they ask you to calculate the diluted eps, if the diluted eps is more that the basic one then the security is antidilutive and should not be included in diluted eps

A good real life example is the \$2B BofA paid to bail out Countrywide. These preferred stock have a dividend of 7.25% and are convertible @ \$18 per share (111.11 M shares). CFC has approx 576 million shares outstanding Now lets suppose CFC reports a loss of \$600 million in Q3, it basic EPS = (-) \$600M/576M = (-) \$1.04 per share. But after taking into account the conversion, shares outstanding increase by 111 million shares = 687 million. We would need to take out the preffered dividend of \$2B * 7.25% * 1/4 (assuming this deal has been in place for the entire quarter) = \$36.25 million => (-) \$600 M + 36.25M = (-) 563.75M EPS after accounting for conversion = (-) \$563.75M/687M = (-) \$0.83 per share This preffered stock will be anti-dilutive untill CFC reports a per share gain of \$0.33 or more. Not happening anytime soon…

I came across something interesting while looking at the # of shares outstanding of CFC. This deal was announced on 08/23, and conveniently on 08/17 BofA securities upgraded CFC. hmmm… Shouldn’t CFC be on a restricted list in BofA, or are we to assume there are enough firewalls within BofA. If not, I wonder this leads to an appearance of violation of what CFA standard?

delhirocks Wrote: ------------------------------------------------------- > A good real life example is the \$2B BofA paid to > bail out Countrywide. These preferred stock have a > dividend of 7.25% and are convertible @ \$18 per > share (111.11 M shares). > > CFC has approx 576 million shares outstanding > > Now lets suppose CFC reports a loss of \$600 > million in Q3, it basic EPS = (-) \$600M/576M = (-) > \$1.04 per share. > > But after taking into account the conversion, > shares outstanding increase by 111 million shares > = 687 million. We would need to take out the > preffered dividend of \$2B * 7.25% * 1/4 (assuming > this deal has been in place for the entire > quarter) = \$36.25 million > => (-) \$600 M + 36.25M = (-) 563.75M > > EPS after accounting for conversion = (-) > \$563.75M/687M = (-) \$0.83 per share > > This preffered stock will be anti-dilutive untill > CFC reports a per share gain of \$0.33 or more. > > Not happening anytime soon… I am a big seller of CFC 0.33 EPS calls…

Never mind