Final answer:
Stock options, rights, and warrants are considered when calculating diluted EPS, which measures earnings per share if all convertible securities were exercised, providing a worst-case scenario for investors.
Step-by-step explanation:
Stock options, rights, and warrants must be considered when calculating diluted EPS (Earnings Per Share). Diluted EPS is a measure used by companies to show the quality of their earnings per share if all convertible securities were exercised. Stock options, rights, and warrants are all examples of convertible securities; they can potentially turn into shares, which would increase the number of outstanding shares and thereby dilute the EPS.
The basic EPS calculation only takes into account the current outstanding shares, while the diluted EPS also includes the effect of these potential shares. For investors, diluted EPS is an important metric as it provides a worst-case scenario for EPS, revealing how the company's profit would be affected if all the securities were converted to shares.