Choice "D" is correct. A dilutive security will produce an earnings per share number below basic earnings per share. The formula for basic earnings per share is income available to common shareholders divided by the weighted average number of common shares outstanding. Basic earnings per share is $1.29, and a dilutive security will result in a lower earnings per share number. If the seven percent convertible bonds are converted, the company will save $49 on each bond ($1,000 x .07 x (1 - .30)), but 40 new shares of stock will be issued. This equates to $1.225 per 1 new share, which is a lower ratio than $1.29 per share. So these securities will be dilutive.
Choice "a" is incorrect. There is no indication given that the shares are convertible, so they will not be dilutive.
Choice "b" is incorrect. If the ten percent convertible bonds are converted, the company will save $70 on each bond ($1,000 x .10 x (1 - .30)) and 20 new shares of stock will be issued. This equates to $3.50 per 1 new share, which is a higher ratio than $1.29 per share. So these securities will be anti-dilutive.
Choice "c" is incorrect. If the convertible preferred stock is converted, the company's earnings per share will increase in the numerator by the $6 dividend that will no longer be paid, while the denominator will increase by 4 for the new shares of common stock issued. That equates to $1.50 per share, which is higher than $1.29.