Company B is a subsidiary of First Corp. and is considering issuing the following types of securities: convertible 8% preferred stock and convertible 8% debentures. Both securities are convertible for 10 shares of common stock.

Discuss

Jane Smith, the CFO for the parent First Corp., asks you to discuss the relative effects of offering these securities. Specifically, she would like you to address:

1. Which security, if converted, would have the greatest impact on Company B's Basic EPS?

2. Which security, if converted, would cause the larger increase in Consolidated Net Income?

3. How will Consolidated Net Income be affected?