Effect on earnings per share (EPS) and book value per share if all convertible securities (convertible bonds, convertible debentures, etc) were converted or all warrants or stock options were exercised. When conversion takes place, a company issues new shares to its convertible shareholders. Issuance of new shares increases the number of shares outstanding. This dilutes the value of each share. Likewise, the exercise of a warrant results in the issue of new shares. The share price will reflect the effect of the eminent exercise date– i.e., it takes into account the impact of anticipated dilution. The impact on the price of a convertible is a function of how much deep-in-the-money the convertible is. Typically, the effect of dilution could be ignored for deep-out-of-the-money convertibles.

In practice, the effect of dilution is not often taken into account in the price of a convertible, although it is relevant.