### CFA Practice Question

There are 534 practice questions for this study session.

### CFA Practice Question

An analyst has gathered the following information about a company:

• 110,000 shares of common stock outstanding at the beginning of the year.
• The company repurchases 20,000 of its own common shares on July 1.
• Earnings are \$300,000 for the year.
• 10,000 shares of existing 10 percent cumulative \$100 par preferred outstanding that is not in arrears at the beginning or ending of the year.
• The company also has \$1 million in 10 percent callable bonds outstanding.
• The company has declared a \$0.50 dividend on the common stock.

What is the company's basic earnings per share?
A. 1.40
B. 2.00
C. 3.00
Explanation: Interest is already deducted from earnings. (300000 - 100000)/100,000

### User Contributed Comments13

User Comment
tanyak where does this question get 300,000/100,000?
Max27 Don't forget about the preferred stock. 10,000 shrs x 10% rate=\$100k. 300k-100k/100k shrs=\$2
steved333 basic eps= (NI-Pref Div)/common
That's why you have to add it back when figuring diluted eps.
AndyBear What does not in arrears mean?
kenjisan Not in arrears means that no amount on the preferred stock is outstanding. Companies can delay payments on preferred stock which would then make the preferred stock 'in arrears'. When they finally make a payment on a preferred stock in arrears, they have to pay the amount they owe + current amount.
boddunah company has pref. stock . pref. dividends are deducted from net income b4 calculating basic eps.
gill15 When it says you have 10000 shares at 10% at par \$100 you end up with 100000 in preferred dividends?

Usually with these questions it says each share of preferred stock gets X amount of dollars per share for dividends.

For this question the 10 percent means dividends?
maria15 Where does the denominator 100,000 came from?
hoyleng maria; 110,000 (beg of the yr o/s shs) - 10,000 (20,000 shs repurchased X 6/12 = 10,000)
JeromeS Basic EPS = [300,000 - (10,000 x 10%) x 100] / [110,000 - (20,000 x 6/12)] = 2
schweitzdm Could someone please explain why we are ignoring the \$0.50 dividend?
jorellana9 @Schweitzdm, EPS is calculated prior to taking out dividends. Thus, the .50 divdend would be removed after EPS is calculated. EPS would be \$2.00 and Final contribution to retained earnings per share would be \$1.50
farhan92 couple things got me here - 1) trying to be smart and not write out the steps 2) the 6/12 on the treasury stocks!