CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

BWT Inc. shows the following data in its financial statements at the end of the year. Assume all securities were outstanding at the beginning of the year:

  • 6.125% convertible bond, convertible into 33 shares of common stock. Issue price $1,000, 100 bonds outstanding.
  • 6.25% convertible preferred stock, $100 par, 3,710 shares outstanding. Convertible into 3.3 shares of common stock, issue price $100
  • 8% convertible preferred stock, $100 par, 5,604 shares outstanding. Convertible into 5 common shares, issue price $80.
  • 12,380 warrants are outstanding with an exercise price of $40. Each warrant is convertible into 1 share of common stock.
  • Average market price of common stock is $53.00 per share. Common shares outstanding at the beginning of the year were 45,888. Net income for the period was $200,000 while the tax rate was 40%.

What were the diluted EPS for the year?
A. 2.16
B. 2.20
C. 2.28
Explanation: (100 bonds)(33 shares/bond) = 3300 shares from bonds
(100 bonds)($61.25 interest per bond) = $6125 interest paid
($6125)(1-.4) = $3675 interest saved
(3710)(3.3) = 12243 shares from convertible preferred stock
+ (5604)(5) = 28020 shares from the other convertible preferred stock
= 40263 total shares common from the conversion of the preferred shares.
(12,380 warrants)($40 exercise price) = $495,200
$495,200/$53 avg. price = 9343 shares common
12,380 - 9343 = 3,037 new shares from the warrants
Preferred dividends = 3710shares x 6.25% = $23187.5
Preferred dividends = 5604 shares x 8.00% = $44,832.00
Total = $23188 + $44832 = $68020
Diluted EPS = [(200,000 - 68020) + 68020 + 3675]/(45,888 + 40,263 + 3,300 + 3,037) =
$203675/92488 shares = 2.20

User Contributed Comments 17

User Comment
kalps The subtraction of the preference dividends and the addition does not make sense - as surely this should just be excluded from the calculation as the preference dividend is ignored when you are working out the diuted earnigs per share
anricus It is therefore excluded!
linr0002 NI includes pref div. Hence do not take out pref div from NI in calculating Diluted EPS
gizi You see the question could be tricky. They may ask you to calculate the DEPS, but the calculation may contain some anti-dilutve elements in it. So you must be aware of the BEPS even though you are asked for the DEPS. Hence the subtracting and adding of pref divs.
gizi If all elements are anti-dilutive, the answer would be the BEPS.
julamo I need an aspirin
whoi erm.... I finally got it wright. Hopefully timing is also okay :)
bahodir why do you need preferred stock's issue price of $80?
cswin 1. 200k-68020 --- NI after preferred div
2. (200k-68020)+68020 --- add int if converted at beg of the year
Rotigga There's no way you can do this kind of problem in 1.5 minutes, which is all you've got in the real exam...
Yurik74 if to assume they all are dilutive it shoud be ok to do it in 90 secs... i hope....
wundac This took 5 minutes to calculate. I need a lot of practice...
drew2009 some porblems only take 10 seconds to answer so these can balance out. I would suggest coming back to them at the end if you might have extra time to check your work.
tll936 I still don't understand why plus 68020 after (200000 - 68020), any brother help me?
majesty When calculating EPS, Net Income should be "cleared" of preferred dividends. Thus, (200000 - 68020). When calculating Diluted EPS, convertible preferred stock is supposed to be converted to common stock and the dividends, that were supposed to be paid, are not paid. Thus we add 68020 back.
gill15 Dont try to understand all the logic in these questions. You dont need to. Just know how to plug and play.

With dilutive you know that Preferred dividend not included -- dont add and subtract to cancel when writing out.

Do the question knowing one to punch. Write it out one time and then you'll see how easy it is to just use your memory function. I saved 7 numbers and then thats it. You can do it 90 seconds
fredpat01 No you dont add the preferred div back. It will be doubled in the NI calculation. Just simply dont subtract it.
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