Which statement is correct about the \"income effect\" on EPS? A) This is the in

Question

Which statement is correct about the "income effect" on EPS? A) This is the incremental before-tax income available to ordinary shareholders. B) This is the incremental after-tax income available to ordinary shareholders. C) This is the incremental number of ordinary shares outstanding before conversion. D) This is the incremental number of ordinary shares outstanding after conversion. 1.1 Which statement is correct? A) The numerator for diluted EPS is the same as the numerator for basic EPS. B) Potential ordinary shares are derivative instruments that entitle the holder to commodities C) Potential ordinary shares are financial instruments that entitle the holder to ordinary shares. D) The numerator for diluted EPS is always greater than the numerator for basic EPS. 1.2 ??: Which statement is correct about the "if-converted" method for EPS? A) This method assumes the convertible security is converted into ordinary shares at the end of the fiscal period. B) This method assumes the convertible security is converted into ordinary shares at the beginning of the fiscal period. C) This method assumes the converible security is converted into ordinary shares evenly over the fiscal period D) This method assumes the convertible security is converted into ordinary shares at the mid-point of the iscal period. 1.3

Explanation / Answer

1.1) Option b is correct because EPS being Earning Per Share is calculated after paying all the dues towards debenture holders , preference shareholders,taxes,etc. Thus, ESP is earnings of equity shareholders.

1.2) Option c is correct as potential equity shares are financial instruments or any other contract which may entitle its holders to equity shares.

1.3) Option b is correct as conversion is assumed to occur on the date later from issuance of securities or beginning of fiscal year.

1.4) Option d is correct because in the money call option is the option when underlying securities market price is greater than call option strike price.

1.6) Option a is correct because diluted EPS considers outstanding shares and convertible securities whereas basic EPS considers only outstanding stock.

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