A company has 1 million shares outstanding at 100 per share and 10 million of convertible bonds with par value 1,000 and a conversion price of 50. How many diluted shares will be outstanding after accounting for the convertibles?

A company has 1 million shares outstanding at 100 per share and 10 million of convertible bonds with par value 1,000 and a conversion price of 50. How many diluted shares will be outstanding after accounting for the convertibles?

• A. 1,100,000
• B. 1,200,000
• C. 1,220,000
• D. 1,010,000

Answer: (B)

When convertible bonds are treated as dilutive, assume they all convert into equity, adding to the share count. Compute how many shares come from the convertibles and then add them to the existing shares. There are 10,000 bonds outstanding (10,000,000 par value ÷ 1,000 per bond). Each bond converts into 1,000 ÷ 50 = 20 shares. So the convertibles would add 10,000 × 20 = 200,000 shares. Add this to the current 1,000,000 shares outstanding, and diluted shares become 1,200,000.

When convertible bonds are treated as dilutive, assume they all convert into equity, adding to the share count. Compute how many shares come from the convertibles and then add them to the existing shares.

There are 10,000 bonds outstanding (10,000,000 par value ÷ 1,000 per bond). Each bond converts into 1,000 ÷ 50 = 20 shares. So the convertibles would add 10,000 × 20 = 200,000 shares. Add this to the current 1,000,000 shares outstanding, and diluted shares become 1,200,000.