CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

The following data pertains to the McGuire Company:

Net income: $15,000
5,000 shares of common stock issued on January 1st
10 percent stock dividend issued on June 1st
1000 shares of common stock repurchased on July 1st
1000 shares of 10 percent, par $100 preferred stock, each convertible into 8 shares of common stock were outstanding the whole year.

What is the company's basic earnings per share (EPS)?
A. 1.2
B. 1.0
C. 2.5
Explanation: Number of average shares:

1/1: 5,500 shares issued (includes 10% stock dividend on 6/1) x 12 months = 66,000
7/1: 1,000 shares repurchased x 6 months = -6,000
60,000 shares/12 months = 5,000 average shares
Preferred dividends = ($10)($1000) = $10,000
Basic EPS = [$15,000(NI) - $10,000(preferred dividends)]/5,000 shares = $5,000/5,000 shares = $1/share

User Contributed Comments 8

User Comment
Shelton If computing the convertibility of preferred
basic EPS = 3
diluted EPS = 1.923077?
Shelton b-EPS=($15k-$10k)/5k=$1, convertible<>converted
ljscott 5,ooo(1.1)(12/12)

thus 15,000-10,000/5,000=1
achu Don't forget to remove the Pref Stock dividends when calculating bEPS
poomie83 I don't the number of shares calc. This is how I have been doing it for other questions:
5000 x 12/12 + 500 x 8/12 - 1000 x 7/12 = 4,750

is this method fundamentally incorrect?
michaeloa3 I don't get their calc for shares outstanding. Why are they including the 10% stock dividend on 1/1 when it wasn't issued until 6/1???
Truly Because stock dividends count for the whole year outstanding, no matter which part of the year they were issued.
dbedford Michaeloa3: because stock dividends are applied retroactively and are not time weighted on their issue
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