### CFA Practice Question

There are 1201 practice questions for this topic.

### CFA Practice Question

BWT Inc. shows the following data in its financial statements at the end of the year. Assume all securities were outstanding at the beginning of the year:

• 6.125% convertible bond, convertible into 33 shares of common stock. Issue price \$1,000, 100 bonds outstanding.
• 6.25% convertible preferred stock, \$100 par, 2,315 shares outstanding. Convertible into 3.3 shares of common stock, Issue price \$100.
• 8% convertible preferred stock, \$100 par, 2,572 shares outstanding. Convertible into 5 common shares, issue price \$80.
• 9,986 warrants are outstanding with an exercise price of \$38. Each warrant is convertible into 1 share of common.
• Average market price of common stock is \$52.00 per share.
• Common shares outstanding at the beginning of the year were 40,045.
• Net income for the period was \$200,000 while the tax rate was 40%.

What were the basic EPS for the year?
A. 4.22
B. 3.97
C. 4.12
Explanation: Basic EPS = (Net income - preferred dividends)/Wt Average shares of common = (\$200,000 - \$35,045)/40,045 = 164,955/40,405 = 4.12

### User Contributed Comments10

User Comment
samal could somebody clarify the following for me, please: You always treat dividends of preferred securities as cumulative and hence subtract them from NI (unless it says specifically that they are non-cumulative). Is this correct??
swift why don't we include the warrant exercise? i know that its basic eps but clearly here they will be exercised - its not hypothetical!! have seen it included before in basic eps- very confused?
haarlemmer It is correct that unless the preferred stock is cumulative, the dividend from PS should not be automatically subtracted from NI

As for basic eps, warrant exercise should not be put into consideration.
miso Could you explain how to get 35045 as a pref divident in numerator as
danlan 6.25*2315+8*2572=35044.75
barther you should take preferred stock into calculation.
aggabad convertibile bond- interest expense already in net income!!!!
lourens So confused, Thought we should take convert bond interest as we are working out basic eps. Okay say I am wrong and we deduct it from income surely we should increase the numbe r of shares under the line
omya We exclude bond interest and WE TAKE PREFERRED DIVIDENDS AS IT IS. its already below the line dont multiply by (1-t)
cfastudypl Since it is basic EPS, which is applicable only to ordinary stock holders and not preference holders, option C is correct. NI is already net of interest of bond holders but gross of preference dividend. So to get the EPS, you need to deduct the preference dividend and divide what is left with the ordinary shares outstanding as shown in AN's explanation above.