Dilutive Securities are securities that are not common stock in form, but allow the owner to obtain common stock upon exercise of an option or a conversion privilege. The most common examples of dilutive securities are: stock options, warrants, convertible debt and convertible preferred stock. These securities would decrease EPS if exercised or if they were converted common stock. In other words, a dilutive security is any securities that could increase the weighted number of shares outstanding.

If a security after conversion causes the EPS figure to increase rather than decrease, such a security is an anti-dilutive security, and it should be excluded from the computation of the dilutive EPS.

For example, assume that the company XYZ has a convertible bond issue: 100 bonds, \$1,000 par value, yielding 10%, issued at par for the total of \$100,000. Each bond can be converted into 50 shares of the common stock. The tax rate is 30%. XYZ's weighted average number of shares, used to compute basic EPS, is 10,000. XYZ reported an NI of \$12,000, and paid preferred dividends of \$2,000.

What is the basic EPS? What is the diluted EPS?

1) Compute basic EPS:
i. Basic EPS = (12,000 - 2,000) / (10,000) = \$1.00

2) Compute diluted EPS:
i. Find the adjustment to the denominator: 100 * 50 = 5,000
ii. Find the adjustment to the numerator: 100 * \$1000 * 0.1 * (1 - 0.3) = \$7,000

3) Find diluted EPS:
i. Diluted EPS = (12,000 - 2,000 + 7,000) / 10,000 + 5,000 = \$1.13

If the fully dilused EPS > basic EPS, then the security is antidilutive. In this case, Basic EPS = \$1.00 is less than the fully diluted ESP, and the security is antidilutive.

Calculating Basic and Fully Diluted EPS in a Complex Capital Structure

Related Articles
1. Investing

The Dangers of Share Dilution

Investors need to be aware of dilutive securities and how they can affect existing shareholders.
2. Managing Wealth

Calculating Basic Earnings Per Share

Basics earnings per share measures the amount of net income earned per share of outstanding stock.
3. Investing

The 5 Types Of Earnings Per Share

A look at the five varieties of EPS and what each represents can help an investor determine whether a company is a good value, or not.
4. Investing

An Introduction to Convertible Bonds

Getting caught up in all the details and intricacies of convertible bonds can make them appear more complex then they really are.
5. Investing

Convertible Bonds: Pros And Cons For Companies And Investors

Learn about the pros and cons of convertible bonds and what effect this has on investors.
6. Investing

3 Best High-Yielding Convertible Bond ETFs (CWB, ICVT)

Discover how convertible bond ETFs can offer investors growth and income while hedging fixed income portfolios in a rising rate environment.
7. Investing

3 Best High-Yielding Convertible Bond Mutual Funds (LACFX, FACVX)

LACFX,FACVX,VCVSX: Learn about three of the highest-yielding options available.
8. Investing

The Top 3 Convertible Bond ETFs for 2016 (CWB, ICVT)

Obtain detailed information on the exchange-traded funds (ETFs) available for traders seeking ETF exposure to convertible bond investments.
1. What is a good annual return for a mutual fund?

Learn the key factors that determine if a mutual fund's return is "good" for you and your needs?
2. How are industrial goods different from consumer goods?

Understand the difference between industrial goods and consumer goods, and learn the different types of industrial goods ...
3. What causes inflation, and does anyone gain from it?

In this article, we will examine the fundamental factors behind inflation, different types of inflation and who benefits ...
4. What is the difference between a buy-side analyst and a sell-side analyst?

The main difference between a buy-side analyst and sell-side analyst is the type of firm that employs them and the people ...