Diluted EPS

[keep_running]

Why do we adjust (add back) basic EPS for coupons and dividends paid on the convertible preferred stock/bonds?
I thought if the preferred stock/bonds were converted, then new shares would not pay the preferred stock dividends/bond coupon payments, which would make these payments irrelevant…

 

[sonuvga]

“I thought if the preferred stock/bonds were converted, then new shares would not pay the preferred stock dividends/bond coupon payments”
exactly…if they will not be paying PS and interest, it shall add (increase) shareholders worth I.e. net income, thus to be added, and remember that interest shall be after tax because that’s what goes to shareholders and not the taxable interest.

 

[S2000magician]

The numerator in basic EPS – net income less preferred dividends – includes the effect of paying interest on convertible bonds (in net income), and the effect of paying preferred dividends.
If the convertible bonds were converted, the interest would not be paid, so it should be added back to net income (net of income taxes).
If the convertible preferred stock were converted, the preferred dividends would not be paid, so they should be added back.

 

[olajideanuoluwa001]

There you have it, Magician explained it.