A public company has 100,000 shares of common stock outstanding. It also has 10,000 shares of 6% cumulative preferred stock, $100 par, convertible into 3 shares of common stock each. Net income for the year is $500,000. No dividends were declared. The tax rate is 30%. What is the Diluted Earnings Per Share (DEPS)?

Step 1: Basic EPS. Preferred Dividends = 10,000 × $100 × 6% = $60,000. (Cumulative means deduct even if not declared). Basic EPS = ($500,000 - $60,000) / 100,000 = $4.40.<br/>Step 2: Diluted EPS (If-Converted Method). Assume conversion at beginning of year. <br/>Numerator: $500,000 (Preferred dividends are not subtracted/are added back). <br/>Denominator: 100,000 + (10,000 × 3) = 130,000 shares. <br/>Diluted EPS = $500,000 / 130,000 = $3.85.<br/>Since $3.85 < $4.40, the securities are dilutive.