Which of the following does not have the potential to cause dilution of EPS? Callable bonds...

Which of the following does not have the potential to cause dilution of EPS?

		Callable bonds
		Convertible bonds
		Warrants
		Employee stock options

Expert Solution

The correct answer is Callable bonds

Dilution of EPS is caused by dilutive potential equity shares. Potential equity shares are considered dilutive if its conversion reduces the earnings per share (EPS).

Following are potential equity shares

Convertible Preference Shares
Convertible bonds and debentures
Share Warrants
Employee stock options

As these can be converted into equity shares for a consideration, the number of shares outstanding will increase upon conversion. This will have the effect of decrease in Earnings per share (EPS).

Callable bond is a fixed cupon long term bond where the issuing firm has the right of early redemption. In other words the issuing firm has the right to buy back the bond from the investor at a predetermined price known as the call price. Usually call price is at the premium to the face value. Callable Bonds cannot be converted into equity shares thus they cannot cause dilution of EPS.

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