Question

Alciatore Company reported a net income of $150,000 in 2018. The weighted average number of common shares outstanding for 2018 was 40,000. The average stock price for 2018 was $33. Assume an income tax rate of 40%. Required: For each of the following independent situations, indicate whether the effect of the security is antidilutive for diluted EPS. 10,000 shares of 7.7% of $100 par convertible, cumulative preferred stock. Each share may be converted into two common shares. 8% convertible 10-year, $500,000 of bonds, issued at face value. The bonds are convertible to 5,000 shares of common stock. 3. Stock options exercisable at $30 per share after January 1, 2020. 4. Warrants for 1,000 common shares with an exercise price of $35 per share. A contingent agreement to issue 5,000 shares of stock to the company president if net income is at least $125,000 in 2019.

Answer 1

1	Anti-Dilutive as the Basic EPS will decrease after conversion of cumulative preferred stock
2	Anti-Dilutive as the Basic EPS will decrease after conversion of Convertible Bonds
3	Dilutive because the exercise price of $30 is less than the market price of $33
4	Anti-Dilutive as the exercise price of $35 per share is not less than the market price of $33
5	Dilutive as the additional 5,000 shares of stock would be added to denominator in determining EPS