Graphical analysis clarifies the algorithm for ranking convertible securities in earnings per share, enhancing understanding.
Davidson and Weil [1975] developed an algorithm for determining the sequence of including convertible securities in earnings per share (EPS), and several articles and textbooks have modified and incorporated the algorithm in discussions of EPS. The purpose of this paper is to illustrate the logic of the algorithm using a graphical approach. In addition, this graphical approach provides a clear interpretation of key variables used in the algorithm and clarifies certain ambiguities that students often experience in using the algorithm.
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Chasteen et al. (1988) studied this question.