What is the purpose of computing diluted EPS?

The computation of diluted earnings per share (EPS) serves to provide a more comprehensive view of a company’s profitability per share by taking into account the potential dilution of shares that could occur through the issuance of convertible securities, options, and warrants. This approach helps to present a conservative measure of earnings, reflecting the possible reduction in earnings per share if all convertible instruments were exercised or converted into common shares.

By calculating diluted EPS, investors gain insight into what the earnings would look like under the assumption that all potential shares are issued, thus offering a more cautious view of the company’s earning power relative to its current share structure. This is particularly important because it helps investors anticipate the impact of potential equity dilution on their earnings.

In contrast, other options do not accurately capture the primary intent behind diluted EPS. For example, minimizing potential shares outstanding is not the goal, as diluted EPS does not seek to limit share count but rather to measure it under worst-case dilution scenarios. Similarly, while reflecting the worst-case scenario for shareholders is partially correct, it does not capture the emphasis on providing a conservative measure of earnings relative to current shares. Lastly, ensuring compliance with tax regulations is unrelated to the purpose of calculating diluted EPS, as it is primarily a measure for assessing financial