Diluted eps are calculated under the assumption that

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Unformatted text preview: Diluted EPS are calculated under the assumption that all contingent securities that would have dilutive effects are converted and exercised and are therefore common stock. They are found by adjusting basic EPS for the impact of converting all convertibles and exercising all warrants and options that would have dilutive effects on the firm’s earnings. This approach treats as common stock all contingent securities. It is calculated by dividing earnings available for common stockholders (adjusted for interest and preferred stock dividends that would not be paid, given assumed conversion of all outstanding contingent securities that would have dilutive effects) by the number of shares of common stock that would be outstanding if all contingent securities that would have dilutive effects were converted and exercised. Rather than demonstrate these accounting calculations,10 suffice it to say that firms with outstanding convertibles, warrants, and/or stock options must report basic and diluted EPS on their income statemen...
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