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 dividends on convertible preferred stock are ______
A. added to earnings available to common shareholders with an adjustment for taxes.
B. added to earnings available to common shareholders without an adjustment for taxes.
C. subtracted from earnings available to common shareholders without an adjustment for taxes.
Explanation: 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 to conv. debt) + (shares issuable from stock options)]

User Contributed Comments 9

User Comment
migi The explanation says that the preferred dividends should be deducted... so its C?
julamo be careful, the question is about convertible preferred dividends
alki if you calc diluted EPS, pref dividends on dilutive securities should be added back to NI
Adkins So the assumption here is that the preferred convertibles shares ARE dilutive.
johnj this answer would have to be in comparison to ordinary EPS, because one should not simply assume that dividends are taken away from NI at first instance, that would be in the case of shareholder's equity
boddunah antidilutive are not used in calculation of dilutive eps.
mickykumar I think this question should have been clearer. In the Programme Curiculum reading 32 page 172 it does not show the adding of the dividend to the net income. So the question should have indicated that assume the net income is less the preference dividend.Then it would be correct to add it back.
dbalakos Why do we need an adjustmtent for tax, I thought preferred dividends are not tax deductible
dbalakos Sorry my comment is wrong. disregard.
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