Chapter 19, Problem 19.9DMP

Communication Case 19–11

Dilution

• LO19–9

“I thought I understood earnings per share,” lamented Brad Dawson, “but you’re telling me we need to pretend our convertible bonds have been converted! Or maybe not?”

Dawson, your boss, is the new manager of the Fabricating division of BVT Corporation. His background is engineering and he has only a basic understanding of earnings per share. Knowing you are an accounting graduate, he asks you to explain the questions he has about the calculation of the company’s EPS. His reaction is to your explanation that the company’s convertible bonds might be included in this year’s calculation.

“Put it in a memo!” he grumbled as he left your office.

Required:

Write a memo to Dawson. Explain the effect on earnings per share of each of the following:

1. Convertible securities.

2. Antidilutive securities.