CFA Practice Question

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CFA Practice Question

The consideration of convertible preferred stock requires that an adjustment be made to which of the following components of the basic earnings per share (EPS) equation if the security is dilutive?

A. The numerator and denominator
B. The numerator
C. The denominator
Correct Answer: A

The numerator will increase because earnings available to the common shareholder are increased by the reduction in preferred dividends. The denominator increases because the weighted average number of shares increases upon conversion of the preferred stock.

User Contributed Comments 9

User Comment
kalps Preferred convertible stock: 1) The Net income increases as the dividend to pref holders is reduced assuming conversion 2) the average number of shares increases due to assume docnversion into ordinary shares
o123 It would be none of the above if the p stock was anti-dilutive.
mordja or if there were no div declared on non-cumulative p stock
magicchip Good question.
Beret Do preferred stocks always have dividends? Also when they are non-cummulative and no dividends are paid in the period?
Sam123456 Doesn't the numerator decrease? When you subtract preferred dividends, you get a smaller number on top. Still choice A) but I wonder if the explanation is off.
johntan1979 Is the dividend to be added back net of tax just like interest expense of a convertible bond?
jonan203 Sam, the numerator increase because you add the preferred dividends (adjusted for tax [div(1-.X%)]) into the numerator as the preferred liability goes away when converted to common
forry9er Johntan - No - Ignore taxes when referring to preferred stock
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