Can anyone confirm? I think the diluted EPS is calculated in this question is wrong. Unless the convertible pref shares also have the same dividend as the preferred shares, pref share dividends should be subtracted from net income.
It says 100m / (25+ 0.5*10m) = 3.33
It should have been 100m-10m / 25+0.5*10 = 3
Net income $100 million Tax rate 25 percent Weighted average number of common shares outstanding 25 million Convertible preferred shares* 10 million Preferred dividend per share $1.00
* Each share is convertible into 0.5 shares of common stock.
When you have questions on diluted EPS with convertible preferred share, I would say that 99% of the time, all preferred shares are convertible. The company will not have any non convertible preferred share so you can consider all of them convertible (Unless it is specifically mentioned in the question). If they are all convertible, then you can ignore the preferred dividend when you calculate Diluted EPS. This is because you deduct dividend from Net Income, but then you add them back since they are converted to common shares. So preferred dividend are actually never paid.
Thanks for the reply. Maybe I misinterpreted the question. I thought there were 2 share classes of preferred shares - one convertible (don’t pay dividends), and one non-convertible ($1 dividend per share). To calculate basic EPS, we deduct the preferred share dividends. To calculate diluted EPS, we add back the ‘convertible pref share dividends’, and the pref shares dividends offset each other, leaving only net income.