### CFA Practice Question

There are 534 practice questions for this study session.

### CFA Practice Question

An analyst has gathered the following information about Barnstabur Inc. for 2015:

• Reported net income of \$30,000.
• 5,000 shares of common stock and 2,000 shares of 8 percent, \$90 par preferred stock outstanding during the whole year.
• During 2014, Barnstabur issued at par, \$60,000 of par, 6.0 percent convertible bonds, with each of the 60 bonds convertible into 110 shares of Barnstabur common stock.

If Barnstabur's effective tax rate is 40 percent, what will Barnstabur report for 2015's diluted earnings per share (EPS)?
A. \$1.66
B. \$2.36
C. \$1.53
Explanation: diluted EPS = adjusted earnings after conversion (EAC) / weighted average plus potential common shares outstanding

Step 1: Calculate adjusted EAC preferred dividends = convertible preferred dividends = (0.08)(90)(2,000) = 14,400 convertible debt interest = (60,000)(0.06)(1 - 0.40) = 2,160 adjusted EAC = (30,000 - 14,400 + 2,160) = \$17,760
Step 2: Calculate weighted average plus potential common shares outstanding.
Step 3: Calculate diluted EPS: diluted EPS = 17,760 / 11,600 = \$1.53.

User Comment
Gina recall: bonds were issued in 2014, but they stay on the books unless noted otherwise, so need to be included into EPS calculation of 2015.
ninaz Do we need to adjust earnings for prefered dividend when calculating dilutive EPS?
chenyx in this case,the convertible preferred stock is antidilutive security rather than dilutive security.
derekt hmmm it NEVER says convertible prefered stock... hence no conversion
awlhoaln how to get 11,600 ?
haarlemmer Nothing is mentioned about the preferred stock is conversional, thus no need to adjust.

About 11,600, it comes in the following way,

5000(original shares outstanding)+60(number of convertable bonds issued)*110(how many common shares could be converted with one bond)
linr0002 Convertible pref stock: (NI-Pref Div)+ Pref Div
Non-convertible pref stock: NI-Pref Div
sarath If non-convertible preferred stock....mean no more addition to common stock.....and also the net income for outstanding common shares should be less than hte preferred dividends given...
fedor5 how do know a par value of 1 bond? i can assume \$100, \$1000, \$10000
Shelton conv.debt.shares = 60bonds * 110shares/bond = 6.6k
jainrajeshv Still not get conversion ration is 110 share for each 60 Bond held. but how many bond are there?
quaggles Jainrajeshv - it is "for each of the 60 bonds held". They are saying there are 60 bonds. I read it the way you did too at first
boddunah did not realize that "conversion not mentioned about preferred stock" . that got me