Brad Dolan, a shareholder of Rhode Corporation, has asked you, the firm’s accountant, to explain why his share warrants were not included in diluted EPS. In order to explain this situation, you must briefly explain what dilutive securities are, why they are included in the EPS calculation, and why some securities are ant dilutive and thus not included in this calculation.
Write Mr. Dolan a 1–1.5 page letter explaining why the warrants are not included in the calculation. Use the following data to help you explain this situation.
Rhode Corporation earned $228,000 during the period, when it had an average of 100,000 ordinary shares outstanding. The ordinary shares sold at an average market price of $25 per share during the period. Also outstanding were 30,000 warrants that could be exercised to purchase one ordinary share at $30 per warrant.