Final answer:
Convertible preferred stock and convertible bonds affect the parent company's earnings per share through the diluted EPS method, where potential conversions are considered to provide a conservative estimate of the firm's earnings potential.
Step-by-step explanation:
Convertible preferred stock and convertible bonds are factored into the computation of earnings per share (EPS) for the parent company by using the diluted earnings per share method. This approach reflects the hypothetical conversion of these securities into common stock, which would then increase the shares outstanding. When computing diluted EPS, the numerator adjusts for any dividends on preferred stock or interest on bonds that would not have been paid if the securities were converted. The denominator increases to reflect the additional common shares that would have been outstanding if the securities had been converted.
It is important to include these potential conversions in EPS calculations, as they provide a more conservative and accurate picture of the company's earnings potential. This method for accounting for convertible securities helps investors understand what their EPS would be if all the convertible securities were converted into common stock, potentially affecting the market's valuation of the company.