CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

Sacho Company's balance sheet on December 31, 2014 included the following:

On October 1, 2015, Sacho issued a 25% stock dividend on its common shares and paid $500,000 cash dividends on preferred shares. Net income for the year ending December 31, 2015 was $2,000,000. Sacho's 2015 basic EPS should be ______.

A. $3.00
B. $3.53
C. $4.00
Correct Answer: A

The numerator = $2,000,000 - $500,000 = $1,500,000. When there are noncumulative preferred shares, only those dividends actually declared - in this case, paid - during the period are subtracted in determining the EPS numerator. The denominator = 400,000 shares x 1.25 = 500,000 shares. A 25% stock dividend is applied retroactively to the beginning of the year. The basic EPS = $1,500,000/ 500,000 = $3.00.

User Contributed Comments 12

User Comment
richcfa2 don't forget how to adjust stock div's /splits in calc
sarath When the dividends are non-cumulative then they will be deducted only when they are declared or paid.....

On the other hand if the dividends are cumulative they have to be adjusted even if they are not declared or paid.....

REMEMBER THIS>..
Cooltallgal How come the time factor (3/12) for Oct 1's issuance of 25% is not used for the calculation of the weighted average of the number of common shares outstanding?
bokica because no new shares were issued. it is adjustment for the entire year that covers also 3 by 12... if the new shares were issued in october (say another 400k) than the calc. will include 400.000 * .25 * 3 over 12? plus the first adjuestment??? correct?
Yurik74 Why do we need to increase 400000 shares by 25%?
kutta2102 Because the dividend to common shareholders was in terms of "stock" - therefore, the total number of shares from the beginning of the year would be 25% more than $400,000.
SriSri Thanks Yurik74 and kutta2102 for stock and cash dividend clarity.
nneks OMG! sometimes I feel like I know nothing compard to you guys....
miiyeung IMPORTANT REMINDER:

When the dividends are non-cumulative then they will be deducted only when they are declared or paid.....

On the other hand if the dividends are cumulative they have to be adjusted even if they are not declared or paid.....
Oarona Thanks to all you. You have clarified a lot of points.
jpducros To remember it, it is all negation together :
If Non-Cumulative, Not-declared or Not-Paid, then Don't substract from the numerator....otherwise do.
jonan203 a 25% stock dividend, means you recieve 1/4 of a new common share for every one share of common stock you hold.

400,000 x 1.25 = 500,000 common outstanding (split adjusted)

remember:
stock dividend = payout in STOCK
dividend = payout in cash
You need to log in first to add your comment.