### CFA Practice Question

There are 534 practice questions for this study session.

### CFA Practice Question

The Fischer Company had a net income of \$1,500,000. Fischer paid preferred dividends of \$5 on each of their 100,000 preferred shares. There are 1 million Fischer common shares outstanding. In addition to the common and preferred stock, Fischer has \$25 million in 4 percent bonds (par value: \$100) outstanding. Each bond is convertible into 4 common shares. If Fischer's tax rate is 40 percent, what is its diluted earnings per share?
A. \$1.00
B. \$0.80
C. \$0.33
Explanation: The numerator is net income plus pre-tax interest. The number of bonds is \$25 million / \$100 = 250,000. The bonds are convertible into 250,000 x 4 = 1 million common shares. Diluted EPS = [\$1,000,000 + \$1,000,000(1 - 0.4)]/[1,000,000 + 1,000,000] = \$0.80

### User Contributed Comments13

User Comment
haarlemmer What a fool I am! Tha par-value of the bond here is unnecessary!
danlan Preferred dividend was counted, so the numerator is 1500000-5*100000+1000000*(1-0.4)=1600000
linr0002 NI includes preferred dividends
Basic EPS does not, add back pref div when working with Basic EPS
harshjit For diluted EPS, after-tax interest on convertible bond is added back to net income in the numerator, assuming the bonds are converted into stocks.
angelafan isn't this convertible debt is anti-diluted?
ljamieson not antidilutive b/c lowers EPS from basic.

dil'd EPS = [1,500,000-5*100,000-.04*25,000,000]/[1,000,000+4*250,000] = .8
tobikemper In the LOS it says the calculatio formula for Diluted EPS is given as follows:
Diluted EPS = (Net Income - Preferred Dividends + Adjustments for Conversions) / (Weighted Average Number of Common Shares Outstanding + Equivalent Number of Potential Common Shares from the Conversion of All Outstanding Dilutive Securities)

Therefore:
[1,500,000 - (5 * 100,000) + (5 * 100,000) +(25,000,000 * 0.04 * (1 - 0.49))] / [1,000,000 + 100,000 + ((25,000,000 / 100) * 4)] = 2,100,000 / 2,100,000 = 1

=> Diluted EPS = 1

Did I do something wrong?
tobikemper Sorry, must be 0.40 for the tax rate, not 0.49!
panvino Tobikemper - i made the same mistake. It doesnt say the preferred stock is convertible, hence denominator is simply 1m + 1m.
potocah why is NI= 1mi? Since it is a diluted EPS, shouldnt we add the 500.000 back?
gaetmichel NI: 1.5m - 0.5m = 1m. 0.5m is the dividends paid to preferred shareholders.
davcer Basic. Eps is 1
farhan92 I was way too tired to compute the diluted so assumed it was anti dilutive. :/