The Effect of Security Type on Earnings per Share Stage Corporation has both convertible preferred stock and convertible debentures outstanding at the end of 20X3. The annual cash payment to the preferred shareholders and to the bondholders is the same, and the two issues convert into the same number of common shares. Required : • If both issues are dilutive and are converted into common stock, which issue will cause the larger reduction in basic earnings per share when converted? Why? • If both issues are converted into common stock, which issue will cause the larger increase in consolidated net income when converted? • If the preferred shares remain outstanding, what conditions must exist for them to be excluded entirely from the computation of basic earnings per share?
Stage is a subsidiary of Prop Company. How will these securities affect the earnings per share reported for the consolidated enterprise?