- CFA Exams
- CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 21. Understanding Income Statements
- Subject 7. Earnings per Share
CFA Practice Question
The following data pertains to the McGuire Company:
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.
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:
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
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) -1000(6/12) 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 |