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Why is the numerator adjusted for convertible bonds when calculating diluted EPS?

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Question added by Frank Mwansa , ACCOUNTING LECTURER , FREELANCER
Date Posted: 2016/05/25
Shameer Nazir Madari
by Shameer Nazir Madari , Assistant Finance Manager , METAL AND RECYCLING COMPANY K.S.C. (PUBLIC)

If the company has convertible preferred stock, use the if-converted method:

 

Method assumes that convertible preferred stock have been converted to common stock, there is no need to pay the preferred dividend. Thus, the numerator of the EPS ratio increases because the preferred dividend need not be subtracted hence while calculating diluted EPS numerator adjusted for convertible bonds.

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