follow up EPS discussion with a question

  • A company has earnings 762 million, down 10% from prior year. - Stock is averaged 18 per share, down from 22 per share. - 600 million shares outstanding. - 12 million shares of 7%, $25 par value cumulative preferred stock. - 4 million shares of 5%, $100 par convertible preferred stock. Each convertible is exchangable into 25 common shares. - 30 million stock options oustanding during the year, option exercise price is $25/share. Calculate diluted EPS. A. 1.04 B. 1.07 C. 1.09 D. 1.24

First compute basic EPS to see of convertible preferred or options have a dilutive effect (on a side note, the options are “underwater” as the exercise price is greater than the average price per share, so we will not bother calculating the potential dilutive effect of options). Basic EPS = (762-12*0.07*25-4*.05*100)/600=(762-21-20)/600=1.2017 Diluted EPS = (762-12*0.07*25)/(600+4*25)=(762-21)/700=1.0586 I guess I would say B.

Map, cccording to the official answer, you are wrong. It’s C. It says numerator for diluted EPS = 762-21+20. That’s against your opinion as well as CPK and others. I am still confused.

The numerator should be 762-21-20+20, no way is 762-21+20.

Check on page 612 in volume 3 CFAI text. It says that earnings should be adjusted for the after-tax effects asuming conversion. That is, add the after-tax effect back to the numerator. Since dividends paid are not deducted for tax purposes, there is no change(no gain in taxes saved) and the entire ammount is added back. Check with your materials provider, this is clearly an error on a matter that you have to know inside-out. You simply make the 20 million in interest (or dividends) previously available for preferred convertible stock owners, available for all common shareholders, since the preferred convertible owners became common stock owners after conversion.

map1 and hope, if you use the way i calculated eps in our previous posts then you get the 762-21+20. I think that if I faced this question on the test I would keep convert pref div out of basic eps

and then you would be wrong. What is the official source of this question? It does seem WRONG totally. The way map1 has calculated it, is the right way. 762 - 21 - 20 + 20 is the numerator. Check the text book, pls. CP

my mistake guys, just checked an online source and your method is good. the answer to this question is wrong

Source is 2007 practice exam 1, pm session, Q 167. Anyway, I will follow you guys’ lead.