CFA Practice Question

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CFA Practice Question

On December 31, 2015 and 2014, Linda Corp. had 100,000 common shares and 10,000 $5 no-par-value cumulative preferred shares outstanding. No dividends were declared on either the preferred or common shares in 2015 or 2014. Net income for 2015 was $400,000. For 2015, earnings per common share amounted to ______.

A. $4.00
B. $3.50
C. $3.00
Correct Answer: B

[$400,000 - 10,000 x $5)]/100,000 = $3.50

User Contributed Comments 15

User Comment
kalps Cumulative therefore need to subtract the amount payable in future - matching principle
cbb1 It's $5 per preferred stock dividend on no-par preferred. Thus, the dividend is $5 times 10,000 shares.

Key is that if cumulative deduct even if not paid; but if not cumulative do not deduct if not paid.
mtcfa If it's cumulative, wouldn't the 2011 dividend eventually have to be made up as well? Therefore the dilutive effect would be $100,000 form the preferred stock, resulting in a $3 eps.
sarath No the cumulative dividend is noted of the current year arrears...
bokica the 50.000 should have been decleared
nagri Cumulative -- Declared or not declared take the current year portion -- don't consider the past arrears
Non-cumulative - take current year only IF DECLARED
viannie cumulative, so even if it's not paid out in 2012, it'll be paid out in the future. Therefore in the calculation, we still have to take it into consideration.
georgek preferred shares mean that these individuals will get dividend before the common shareholders do. if they weren't declared in 2010, 2011, they are still owed the $5 from each period. However, that $5 is "taken" IN THAT period, and doesn't mean it is all subtracted from 2012. In other words, the company still owes another $10 before common guys get their dividend and will be made up at some future point.
fmhp Preferred stock can either be cumulative or noncumulative. A cumulative preferred stock requires that if a company fails to pay any dividend or any amount below the stated rate, it must make up for it at a later time. Dividends accumulate with each passed dividend period, which can be quarterly, semi-annually, or annually. When a dividend is not paid in time it is said that the dividend has "passed" and all passed dividends on a cumulative stock is a dividend in arrears. A stock that doesn't have this feature is known as a noncumulative or straight[5] preferred stock and any dividends passed are lost forever if not declared.
Saxonomy Remeber, the cumulative dividends of $50,000 at end of 2011 was included in 2011's EPS. No need to include it in 2012's EPS.

Calculation should be:

**Net Income for 2012**
divided by
**Any "changes" in the firm's cumulative dividend**
ppboi16 Good Question!
ColonelCFA tricky
TheProfet All unpaid dividends owed to the preferred shareholders should be subtracted

[400,000 - (50,000 * 2)]/100,000 = 3

Only income available to common shareholders belongs in the numerator.
TheProfet Checked notes again.... Only current preferred dividends are subtracted. 3.50 is correct.
nbazilev I don't understand why the denominator is 100,000 - can someone help?
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