If I have the situation as follows:
1st Jan: 1mil common share outstanding
1st Mar: Issue 0.1 mil convertible bond: conversion rate 1:5
1st June: Stock split 2:1
Assume that convertible bonds are dilutive securities the denominator will be calculated as follow:
(1mil * 12/12 + 0.1mil * 5 *10/12) * 2 = 2.83 mil shares
Is that correct? I mean I have to consider the stock split effect for the convertible bonds if they are converted?
Yes.
When there’s a stock split, reverse stock split, or stock dividend, the conversion ratio for convertible bonds is adjusted accordingly.
Thanks S2000,
One more question
What about stock dividend? We also have to consider if the stock dividend happen after the convertible securities issue, or the new issuance share from treasury stock method?
A stock dividend is the same as a split; e.g., a 10% stock dividend is really just a 11:10 stock split.