CFA Practice Question

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CFA Practice Question

True or False?

A company with net income of $450,000, 200,000 weighted-average shares of common shares outstanding, and 10,000 shares of $5 cumulative preferred stock outstanding would have earnings per share of $2.00 per share of common stock.
Correct Answer: True

Preferred dividends: 10,000 x $5 = $50,000. Net income minus preferred dividends: $450,000 - $50,000 = $400,000. Earnings per share of common stock: $400,000 / 200,000 = $2.00

User Contributed Comments 12

User Comment
kalps SHoot me if you think I'm stupid but this question is very very poorly worded - 10,000 shares of $5 - implies par value in my books
LogicMan I won't shoot you kalps. The $5 is not the par value but cumulative dividends in arrears.
db28luke I agree with kalps. Question implies that the book value is $5 per preferred share not $5 of dividends per preferred share.

Also, even if the $5 is the cumulative dividend, don't you only subtract the dividend attributable to the specific year you are calculating?
Done Where the $5 is placed in the question it refers to the dividend not the book value.

$5 cumulative($100)par value preferred stock
5% cumulative preferred stock
sarath A $5 cummulative preferred stock means a dividend of $5 to the preferred stock holders....NOTE THIS.
rfvo Nice one Sarath!!
cleopatraliao Just wondering...wouldnt the denominator will also increase by the no. of shares created from conversion like in the study notes??HELP PLS LOL
cleopatraliao ok maybe i got it this is talkin about the Basic EPS not dilutive EPS:D
papajohn It isn't mentioned anywhere in the question that the preferred stock is convertible, and therefore isn't dilutive..this is why the denominator is 200,000 & not 210,000
ngen @papajohn No, the denominator used is 200k because the question is asking for Earnings per *common share* . absurd measure but thats the reason. Preferred stocks are convertible by default.
ascruggs92 @ngen: Preferred shares are not convertible by default. I don't know where you heard that.
dbedford My Mnemonic for this is "The Knights who say 'NI' are without a police department and they live over a Washo"

(NI-PD)/wtd avg shr outstd "washo"
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