- CFA Exams
- CFA Exam: Level I 2021
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 21. Understanding Income Statements
- Subject 7. Earnings per Share

###
**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?

B. The numerator

C. The denominator

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 |