CFA Practice Question

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CFA Practice Question

Last year, the AKB Company had net income equal to $5 million. Combined state and local taxes were 45 percent. The firm paid $1 million to its 1 million common shareholders and $250,000 to 100,000 preferred shareholders. What was AKB's earnings per share (EPS) last year?

A. $2.25
B. $3.75
C. $4.75
Correct Answer: C

EPS = earnings available to common shareholders divided by the weighted average number of common shares outstanding. Earnings available to common shareholders is net income minus preferred dividends, or $4,750,000 (= $5 million - 250,000) for AKB.

User Contributed Comments 11

User Comment
kalps Under US GAAP Net income does not equalt the payment of dividneds, hence the pref fivs will need to be subtracted to get the net income available to ordinary shareholders
hallow It should be $4750000/1000000 = $4.75.
Done What happen to the taxes? You don't need it?
sally notice the net income: tax has been excluded from it.
mordja Mention of tax and the amount paid to ordinary shareholders are red herrings.
yael Net Income means the amount is already net of taxes.
meghanchloe Good one yael!
jpducros In that type of question, you'll only need the tax rate if you have convertible Bonds, to calculate the impact of the tax on the interest. Otherwise delete that info.
cleopatraliao Also the denominator is only concerning about common shares outstanding but does not include no. of preference stock right because it hasn't been converted yet...?am i correct?
majesty Only new in this question for me is idomatic expression "Red Herring"
johntan1979 Spell idiomatic like an idiot
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