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Question:

If the convertible bonds are considered dilutive, the number of shares of common stock that the analyst should use to calculate diluted earnings per share is:

A 1,100,000.
explanation

1212When the capital structure contains options or warrants, the treasury stock method uses the average price. In this situation, the warrants are antidilutive because the exercise price of the warrant (25) is higher than the market price of the stock (20). Thus, warrants are excluded. Otherwise, common shares would be reduced.
original shares of common stock =
Then add the impact of the bond conversion:
(10,000)(20) x (6/12) = 100,000
Thus, the adjusted denominator for fully diluted EPS is:
1,000,000 + 100,000 = 1,100,000

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