Question

Because diluted EPS include dilutive securities such as convertible securities and employee stock options, it must always be less than or equal to basic EPS.

select one:
A) True
B) False

Answer 1

Diluted EPS must always be less than or equal to basic EPS because diluted EPS considers the potential increase in shares from convertible securities and stock options, reducing EPS if income remains unchanged. True is the correct answer.

Step-by-step explanation:

The statement that diluted EPS must always be less than or equal to basic EPS because it includes dilutive securities such as convertible securities and employee stock options is True. This is because diluted EPS accounts for all possible shares that could be created from these dilutive financial instruments. If these instruments were converted to common shares, it would increase the total number of shares outstanding, which in turn would typically reduce earnings per share if income remained constant. However, it's important to note that if the dilutive securities have an anti-dilutive effect (meaning that their conversion would increase EPS), they are not included in the calculation of diluted EPS. Anti-dilution occurs in situations where conversion of securities into common stock would result in an increase in EPS, such as when the proceeds from the conversion would generate additional earnings that would more than offset the dilutive effect of the increased number of shares.