I don’t understand why the warrants are not included in the calculation for the Diluted shares in this question: On 2005 Income statement, Net Income was $300,000 Average common shares throughout the year was 20,000 Preferred Shares with face value of $100,000 and paying 1.5% cumulative quarterly dividend were outstanding throughout the year Convertible bonds with face value of $200,000 and annual coupon rate of 10% were issued on July 1st, 2005. They are convertible into common shares at the rate of 15 shares per $1,000 FV. 7,500 warrents were outstanding with exercise price of $42. They were issued on January 1st, 2005. The avg market share price during the year was $40. It seems that I got a brain cramp. I completely forgot some rules in Diluted EPS. I didn’t realize that they will be on the exam for Level 2. The following question asks whether it is more appropriate to use Dilutative and General Valuation purposes.
The last sentence should read: The following question asks whether it is more appropriate to use Dilutative FOR General Valuation purposes.