Earnings per share, debt financing costs and debt composition - a simulation model

The advent of the Accounting Principles Board Opinion No. 15, Earnings Per Share has1 generated a good deal of discussion concerning the theoretical underpinning, the complexities of computation and the final results of determining primary and fully diluted earnings per share. Both Opinion No. 15 and the earlier Opinion No. 9, which was modified by Opinion No. 15, reflect the concern of the accounting profession with a single, important statistic.The new ruling required convertible debt be considered as common stock equivalents, and therefore enter to the denominator of the primary EPS statistic, if, and only if, “... at the time of issuance, based on market price, it has a cash yield of less than 66 2/3% of the then current bank prime interest rate.”2 Otherwise, it is included in the fully diluted EPS, which reflects maximum potential dilution.