Convertible Preferred Stock dividends

CFA Level I FRA
#1

Hi guys,

Do we need to just ignor convertible preferred stock dividends when it is dilluted (becouse it will not be paid anymore)?! Page 188 FRA book. Don’t we need to add whem back into numerator? Why?

Thanks.

#2

Diluted EPS is based on “if converted” method

It is treated as though the preference shares were converted so the preference dividend is now available to common shareholders. We basically subtract from Net Income then add back the same amount (net to zero)

In basic EPS it is assumes the pref. shares are not converted so the dividend must be paid before anything is paid to common shareholders. For this reason we subtract from Net Income.

#3

Cos they are now ordinary shareholders, they don’t get preferred dividends anymore, so you don’t deduct preferred dividends anymore.

#4

You deduct them for basic EPS, then add them back when the preferred shares are converted; as the net in the latter case is zero, you have, in effect, ignored them.