- CFA Exams
- CFA Level I Exam
- Topic 4. Financial Statement Analysis
- Learning Module 2. Analyzing Income Statements
- Subject 5. Earnings per Share
CFA Practice Question
True or False?
A company with net income of $450,000, 200,000 weighted-average shares of common shares outstanding, and 10,000 shares of $5 cumulative preferred stock outstanding would have earnings per share of $2.00 per share of common stock.
Correct Answer: True
Preferred dividends: 10,000 x $5 = $50,000. Net income minus preferred dividends: $450,000 - $50,000 = $400,000. Earnings per share of common stock: $400,000 / 200,000 = $2.00
User Contributed Comments 12
| User | Comment |
|---|---|
| kalps | SHoot me if you think I'm stupid but this question is very very poorly worded - 10,000 shares of $5 - implies par value in my books |
| LogicMan | I won't shoot you kalps. The $5 is not the par value but cumulative dividends in arrears. |
| db28luke | I agree with kalps. Question implies that the book value is $5 per preferred share not $5 of dividends per preferred share. Also, even if the $5 is the cumulative dividend, don't you only subtract the dividend attributable to the specific year you are calculating? |
| Done | Where the $5 is placed in the question it refers to the dividend not the book value. $5 cumulative($100)par value preferred stock or 5% cumulative preferred stock |
| sarath | A $5 cummulative preferred stock means a dividend of $5 to the preferred stock holders....NOTE THIS. |
| rfvo | Nice one Sarath!! |
| cleopatraliao | Just wondering...wouldnt the denominator will also increase by the no. of shares created from conversion like in the study notes??HELP PLS LOL |
| cleopatraliao | ok maybe i got it this is talkin about the Basic EPS not dilutive EPS:D |
| papajohn | It isn't mentioned anywhere in the question that the preferred stock is convertible, and therefore isn't dilutive..this is why the denominator is 200,000 & not 210,000 |
| ngen | @papajohn No, the denominator used is 200k because the question is asking for Earnings per *common share* . absurd measure but thats the reason. Preferred stocks are convertible by default. |
| ascruggs92 | @ngen: Preferred shares are not convertible by default. I don't know where you heard that. |
| dbedford | My Mnemonic for this is "The Knights who say 'NI' are without a police department and they live over a Washo" (NI-PD)/wtd avg shr outstd "washo" |