From Schweser Qbank; Anti-dilutive securities should: A) be used in calculating basic EPS but not diluted EPS. B) be used in calculating diluted EPS but not basic EPS. C) not be used in calculating basic or diluted EPS. Your answer: A was incorrect. The correct answer was C) not be used in calculating basic or diluted EPS. Antidilutive securities would increase EPS if exercised or converted to common stock. My question is that why C is correct? Is that means if we know that a certain security is untidilutive then we should not consider it in calculating of even basic EPS?
Basic EPS only uses shares outstanding so the existance of potential dilutive/anti-dilutive securities doesn’t matter. And it looks like you already know they should not be used in calculating Diluted EPS, so that is why C is correct.
If the price of share is lower than the option price, one would not purchase the share at the price that the option allows. I.e share A = $3 right now…but you are given the option to buy it at 5. Makes more sense to purchase it straight at # rather than exercising the option to buy at $5 I hope i worded that right…
- By principal antidilutive securities are not used in Basic EPS. 2. In order for Diluted EPS < Basic EPS, these securities are left out. That relationship must hold.