Abstract ABSTRACT: A contingent claims valuation model is used to estimate the values of a sample of convertible bonds and to partition those values into their debt and equity portions. The model and market values of the bonds are compared and model estimates are found to be approximately unbiased relative to market values, with about 90 percent of the values within ten percent Of market values. The average equity values of the convertible bonds are found to constitute 16.7 percent and 18.4 percent of the book and market values of the bonds, respectively. When leverage and dilution measures for the sample are restated by excluding the estimated equity value of convertibles from debt, differences are small on average, but for some firms they are substantial. A comparison of reported earnings per share (EPS) with EPS using model equity values reveals that model EPS differs cross-sectionally from both primary and fully diluted EPS but is much closer on average to primary EPS. The findings of the study provide reason for optimism regarding applications of contingent claims models to practical valuation problems, particularly with regard to more meaningful measures of dilution of earnings and leverage.