Foundations of Financial Management Study Set 5
Quiz 19: Derivative Securities
Diluted Earnings Per Share Must Include All Convertible Securities
Diluted earnings per share must include all convertible securities.
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In order to calculate (basic) earnings per share, the earnings after taxes have to be adjusted for the elimination of the convertible bond interest expense.
Forced conversion refers to the corporation calling a convertible bond when the market price of the stock is above the conversion price.
A convertible bond has both a downside limit (the pure bond value) and an upside limit (the conversion price).
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