- 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?
Diluted earnings per share are computed under the assumption that all convertible securities have been converted into additional common shares at the beginning of the current period.
Correct Answer: False
The purpose of this pro forma computation is to warn common stockholders of the risk of future earnings per share being reduced due to the conversion of other securities into common stock.
User Contributed Comments 10
| User | Comment |
|---|---|
| Alastair | False if they were issued during the period |
| Gina | i thought that issuance/repurchase of common stock/treasury stock during the year was the only "event" that could happen during the year, and that all convertible events are calculated as of beginning of the current period -- is this correct or not?? |
| examinee | It should be false for 2 reasons: 1. If securities are issued mid way then we have to do weighted average for covertible securities, warrants and options. 2. Securities will only be converted if they have a dilutive effect o/w they will be ignored. |
| sarath | Good point. Only diluted effect considered. 2. If securities are issued in the middle of the year, then it has to be considered from that point. |
| o123 | tricky question. |
| anastasiya | Quote from the CFA textbook, p.168: when a company has convertible preferred stock outstanding, diluted EPS is calculated using the if-converted method (i.e., what EPS would have been if the convertible preferred securities had been converted at the beginning of the period). |
| georgek | this is a tricky question and has to do with the "has been converted" vs. "if-converted" |
| Saxonomy | Diluted EPS is not calculated with an assumption that something has happened, but rather, it's calculated to disclose what the EPS would be IF something happened. |
| johntan1979 | I think the explanation given by examinee (3rd comment from the top) makes the most sense. Thanks examinee! |
| gill15 | Securities are converted at the BEGINNING of period OR at the date of Issue IF later....just think about the mathematical question's we've done in this section...use math equations to understand logic |