CFA Practice Question

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CFA Practice Question

True or False?

Diluted earnings per share are computed under the assumption that all convertible securities have been converted into additional common shares at the beginning of the current period.
Correct Answer: False

The purpose of this pro forma computation is to warn common stockholders of the risk of future earnings per share being reduced due to the conversion of other securities into common stock.

User Contributed Comments 10

User Comment
Alastair False if they were issued during the period
Gina i thought that issuance/repurchase of common stock/treasury stock during the year was the only "event" that could happen during the year, and that all convertible events are calculated as of beginning of the current period -- is this correct or not??
examinee It should be false for 2 reasons:
1. If securities are issued mid way then we have to do weighted average for covertible securities, warrants and options.
2. Securities will only be converted if they have a dilutive effect o/w they will be ignored.
sarath Good point. Only diluted effect considered.

2. If securities are issued in the middle of the year, then it has to be considered from that point.
o123 tricky question.
anastasiya Quote from the CFA textbook, p.168: when a company has convertible preferred stock outstanding, diluted EPS is calculated using the if-converted method (i.e., what EPS would have been if the convertible preferred securities had been converted at the beginning of the period).
georgek this is a tricky question and has to do with the "has been converted" vs. "if-converted"
Saxonomy Diluted EPS is not calculated with an assumption that something has happened, but rather, it's calculated to disclose what the EPS would be IF something happened.
johntan1979 I think the explanation given by examinee (3rd comment from the top) makes the most sense.

Thanks examinee!
gill15 Securities are converted at the BEGINNING of period OR at the date of Issue IF later....just think about the mathematical question's we've done in this section...use math equations to understand logic
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