### CFA Practice Question

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### CFA Practice Question

The Allen Corporation had 100,000 shares of common stock outstanding at the beginning of the year. Allen issued 30,000 shares of common stock on May 1. On July 1, the company issued a 10 percent stock dividend. On September 1, Allen issued 1,000 ten-percent bonds convertible into 21 shares of stock each. What is the weighted average number of shares to be used in computing basic and diluted earnings per share (EPS) respectively, assuming the convertible bonds are dilutive?
A. 132,000; 139,000
B. 130,000; 132,000
C. 132,000; 146,000
Explanation: Calculating Basic Shares:
Jan 1: 100,000 shares outstanding
May 1: 30,000 shares issued
July 1: 10% stock dividend issued

The 10% stock dividend is retroactive, therefore: 110 shares * 12 months = 1,320,000.
33,000 shares * 8 months = 264,000

Total share-month = 1,584,000
Average shares = (1,584,000 / 12) = 132,000

Calculating diluted shares: (1000 bonds) * (21 shares each) * (4 months) = 84,000
total share - month 84,000 / 12 = 7000 average shares
Total diluted shares = 7,000 (from convertible bonds) + 132,000 (from stock) = 139,000

User Comment
rgat Reading 32 p 176.Diluted EPS when co has convertible debt outstanding:
"Diluted EPS is calced using the if-converted method (i.e. what EPS would have been if the convertible debt had been converted at the beginning of the period)".
So, why does the answer weight the 21,000 shares of converted debt by the fraction of months outstanding??
According CFA reading, you should take the 21,000 shares all the way back to the start of the accounting period and work throught the same calculation using 121,000 starting shares rather than 100,000 starting shares.
charliedba No rgat. The number of shares created from the conversion should be weighted by the time that these shares would be outstanding. What you suggested apply to options and warrants only.
zeiad rgat take care (option and warrants only)
Chebum Should we just add it back onto average outstanding shares so my answer wanted to be 153000?
homersimpson For 30,000 shares issued on May 1, how come it is calculated as 33,000*8 months. Shouldn't it be 30,000*8? including 10% stock dividend?
Skrills 10% stock dividend increases 30 to 33,000
thekobe tip, just take a look at the difference between both numbers, tha only one that differs by 7000 21*10* 4/12 is A
cfastudypl Thekobe, Yours is smart approach. Well done!
bram take note that they are newly issued convertibles - if the convertibles are issued and outstanding from prior periods they are considered 100% weighting in the diluted eps
rojaslav bram - you are right, your observation is key to get this one right. Ty!