Dilution

Exam items typically hand you net income, weighted-average basic shares, and a slate of convertibles or options, then ask for diluted EPS — the tell is that the answer hinges on the if-converted method for convertible bonds/preferred (add back after-tax interest, or preferred dividends, to the numerator and add the conversion shares to the denominator) and the treasury-stock method for options/warrants. The classic trap is the antidilutive screen: a security that would raise EPS is excluded, so the right answer is often a smaller adjustment than the brute-force calculation suggests. Out-of-the-money options are simply ignored.

Don’t confuse dilution with issuance, the broader act of raising capital — dilution is only the per-share-ownership consequence of issuing equity, not debt. Contrast it with a buyback: repurchases shrink the share count, but the EPS effect depends on financing — accretive only when the earnings yield exceeds the after-tax cost of the cash or debt used, otherwise dilutive. A memory hook for the EPS calc: “diluted is the conservative, lower number” — if a path pushes EPS up, it’s antidilutive and gets thrown out.