DLC Ltd. has calculated its basic EPS to be $5.50 at the end of Year 4 and has the following outstanding debt and equity information.
i) $2,000,000 in 10% convertible bonds. Each $1,000 bond could be converted to 8 common shares.
ii) 5,000 outstanding stock options awarded at the start of Year 4 to executives at DLC with an exercise price of $55. The price of DLC stock reached $58 on
July 1, Year 4.
iii) 50,000 convertible preferred shares issued at the start of Year 4, each with a $50 annual cumulative dividend paid at the end of each year. Each preferred share could be converted to 10 common shares.
The corporate tax rate is 40%. Which of the above items could dilute the basic EPS?
a) i) only.
b) iii) only.
c) ii) and iii) only.
d) All of i), ii) and iii).