Diluted EPS with the If-Converted Method

Which of the following statements is correct regarding the if-converted method of calculating diluted EPS?

Incorrect. The numerator of the diluted EPS calculation can be adjusted for preferred dividends in the case of convertible preferred stock, and the difference in interest expense in the case of convertible debt.

Incorrect. For full impact, the conversions are assumed to take place at the beginning of the period.

Correct! In the case of convertible preferred stock, the preferred dividends that are subtracted from net income in the basic EPS calculation are removed, increasing the numerator. In the case of convertible debt, the after-tax interest expense is added to the numerator.

The numerator is fixed

The conversions are assumed to take place mid-year

The conversion of both convertible debt and convertible preferred stock has positive effects on the earnings available for common shareholders