Answer: £2.40.

## Diluted EPS Calculation **Step 1: Calculate Basic EPS** Basic EPS = (Net Income - Preferred Dividends) / Weighted Average Common Shares Outstanding Basic EPS = (£1,800,000 - £600,000) / 500,000 Basic EPS = £1,200,000 / 500,000 = **£2.40** **Step 2: Check if Convertible Preferred Shares are Dilutive** For convertible preferred shares, we use the **if-converted method**: 1. **Adjust numerator**: Add back preferred dividends that would not be paid if converted 2. **Adjust denominator**: Add common shares that would be issued upon conversion **If-converted EPS calculation**: - **Adjusted numerator**: £1,800,000 (no subtraction of preferred dividends since they wouldn't be paid if converted) - **Adjusted denominator**: 500,000 + (25,000 × 4) = 500,000 + 100,000 = 600,000 shares If-converted EPS = £1,800,000 / 600,000 = **£3.00** **Step 3: Determine Dilutive Effect** - Basic EPS = £2.40 - If-converted EPS = £3.00 Since £3.00 > £2.40, the convertible preferred shares are **anti-dilutive** (they would increase EPS, not decrease it). **Step 4: Apply Dilution Rules** According to accounting standards: 1. Only **dilutive** securities are included in diluted EPS calculation 2. Anti-dilutive securities are excluded 3. Diluted EPS should be less than or equal to basic EPS Since the convertible preferred shares are anti-dilutive, they should not be included in the diluted EPS calculation. **Step 5: Final Diluted EPS** Diluted EPS = Basic EPS = **£2.40** **Verification**: - Basic EPS = £2.40 - If-converted EPS = £3.00 (anti-dilutive) - Therefore, diluted EPS = £2.40 **Answer**: £2.40 (Option A)

Author: LeetQuiz .