# Diluted EPS question

Hi guys, If a diluted eps question includes all three - stock options, convertible debt and preferred convertible stock, do both the preferred dividends part of the numerator just net out? Thank you

Ok this might make my question more clear - Here’s a sample EPS question: "During 2006, ZZZ reported net income of \$115,600 and had 200,000 shares of common stock outstanding for the entire year. ZZZ had 1000 shares of 10% \$100 par convertible preferred stock, convertible into 40 shares each, outstanding for the entire year. ZZZ also had 600, 7%, \$1000 par value convertible bonds, convertible into 100 shares each, outstanding for the entire year. Finally ZZZ had 10,000 stock options outstanding during the year. Each option is convertible into one share of stock at \$15 per share. The average market price of the stock for the year was \$20. What are ZZZ’s basic and diluted EPS? (assume a 40% tax rate). Answer 115600-10,000+10,000+25,200 ------------------------------------------- 200,000+40,000+60,000+2500 = 0.47 As you notice on the numerator you minus the preferred dividends from Net income (\$10,000) however you add the “convertible preferred dividends”. Im confused are these 2 the same thing? So they just net out?

Agree with you trogulj, they just net out. Maybe the author want to make the numerator more systematic, by starting from the earning that only available for the lowest priority lender, then followed by the higher priority ones, finally the highest priority ones.

thankyou for confirming this.

I’m gonna piggy back on here with my diluted eps question NI 16,500,000 Shares outstanding 300,000 Tax rate 40% Avg share price \$372 50,000 Convertible bonds outstanding @ 9% with 1,000par value Bonds convertible into 2 shares common this is a schweser question and I am getting the wrong value for diluted EPS and I would like to see what one of you guys get. Thanks much

not a Schweser question but similar

Joetheboss Wrote: ------------------------------------------------------- > I’m gonna piggy back on here with my diluted eps > question > > NI 16,500,000 > Shares outstanding 300,000 > Tax rate 40% > Avg share price \$372 > 50,000 Convertible bonds outstanding @ 9% with > 1,000par value > Bonds convertible into 2 shares common > > this is a schweser question and I am getting the > wrong value for diluted EPS and I would like to > see what one of you guys get. > > Thanks much What is the answer? 48

Thanks man

Trogulj, where did you get the 25,200 in the numerator and 2,500 in the denominator?

Trogulj, bear in mind that there might be a question where not all preferred shares are convertible. If thats the case then the preferred numbers on the numerator DO NOT net out.