Hey everyone, could you tell me that in the following question, if the preferred share is anti-dilutive or not?
A company has outstanding the entire year 100,000 shares of common stock and 50,000 shares of convertible preferred stock. Eash share of preferred stock is convertible into three shares of common stock. It also has 100,000 stock options outstanding the entire year, each of which allows the holder to acquire one share of common stock for $10. During the year, the company paid dividend of $0.5 per share on the comon stock and $5.00 per share on the preferred stock. Net income for the year was $450,000 and the income tax rate was 30%. Average market price of the common stock for the yar was $25.00.
What are the basic and diluted earnings per share?
Basic: 2.00, 3.00, 4.50
Diluted: 1.00, 1.25, 1.45.
I got basic EPS=2.00 and diluted EPS=1.45. But the answer for diluted EPS is 1.25.
I don’t understand how the preferred stock is anti-dilutive. When I use the formula given in the book to check the effect on preferred stock: 5*50000/(3*50000)=1.67, which is smaller than the basic EPS 2.00. Therefore to me, this PS is dilutive and therefore should be included in the calculation of the diluted EPS. But the answer says it is antidilutive because 1.67 is greated than 1.25, the basic EPS with just the options (200,000/(100000+60000)). But I mean, 1.67 should be compared to basic EPS of 2.00, no??
Also, the book presents us the method to check if a particular preferred share and convertible bond are antidilutive or not, but nothing for the options. Therefore, do we always assume the options are dilutive and should always include them in our dilutive EPS calculation?
Thx in advance!!!