CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

In calculating the numerator for diluted earnings per share, the interest on convertible debt is ______

A. subtracted from earnings available to common shareholders with an adjustment for taxes.
B. added to earnings available to common shareholders with an adjustment for taxes.
C. subtracted from earnings available to common shareholders without an adjustment for taxes.
Correct Answer: B

Formula = Diluted EPS = [(Net income - Preferred dividends) + Convertible preferred dividends + (Convertible debt interest)(1 - t)] / [(Weighted average shares) + (Shares from conversion of conv. pfd shares) + (Shares from conversion of conv. debt) + (Shares issuable from stock options)]

User Contributed Comments 3

User Comment
muneeb70 Convertible debt ADDS on the net income (as company takes on the debt) but needs to be adjusted for tax before it is added. Thus, its Added.
nayagan When the convertible debt is exercised, the company no longer has to make interest payments. Interest payments were included in net income, so they must be added back to earnings. Since interest is TE, added back at marginal tax rate. Yes?
bidisha yes
You need to log in first to add your comment.