# FSA Question from Schweser sample exam 1 afternoon session

Q169. Thunderbird Company reported net income of \$500 million and the company had 100 million common shares outstanding. In addition, Thunderbird had 5 million shares of convertible preferred and 10 million outstanding warrants during the year. Each preferred share pays a dividend of \$4 per share and is convertible into 3 common shares. Each warrant is convertible into 1 common share at \$25 per share and the company did not declare any dividends for the year. Thunderbird’s diluted earnings per share for the year is closest to: A. \$4.00 per share B. \$4.20 per share C. \$4.80 per share

Answer from Schweser is A. \$4 per share. In the case of convertible preferred, don’t we just add back the preferred dividends? Should the solution be: (500mil)/(100mil+5mil+15mil)=\$4.20 Please help! Thanks!

no… it should be: 500/(100+15+10) =4.00

glitzy i think you sould multiply the no of preferred stocks by 3 . 500/(100+(5*3)+15)=3.8 or 4

sorry the no of warrants would be 10 not 15

glitzy Wrote: ------------------------------------------------------- > Answer from Schweser is A. \$4 per share. > > In the case of convertible preferred, don’t we > just add back the preferred dividends? > Should the solution be: > > (500mil)/(100mil+5mil+15mil)=\$4.20 > > Please help! Thanks! Just to clear this up the solution is: Dilutive EPS = (500MM)/(100MM + 15MM + 10MM) = \$4.20 EPS 500MM = (500MM - 20MM preferred dividend) + 20MM preferred dividen 100MM = common shares outstanding 15MM = 5MM pref * 3:1 convertible ratio 10MM = 10MM warrants * 1:1 convertible ratio To check: Basic EPS = (500MM - 20MM preferred dividend)/100MM = \$4.80 Dilutive EPS is ALWAYS < Basic EPS.

Warrants =(50-25)/50*10mm=5mm??? So the denominator is 100MM (common shares) +15M (common converted from convertible pref)+5MM (warrants) = 120MM the numerator = should it be 500MM-20MMpref div+20MM pref div=500MM or Schweser’s solution was: (500MM-20MM)/120MM=\$4

MY MISTAKE! The average price of the stock is \$50! Revised the question: ------------------------------------------------------- > Q169. > Thunderbird Company reported net income of \$500 > million and the company had 100 million common > shares outstanding. In addition, Thunderbird had 5 > million shares of convertible preferred and 10 > million outstanding warrants during the year. Each > preferred share pays a dividend of \$4 per share > and is convertible into 3 common shares. Each > warrant is convertible into 1 common share at \$25 > per share. The company’s stock traded at an average \$50 per share and the company did not declare any > dividends for the year. Thunderbird’s diluted > earnings per share for the year is closest to: > > A. \$4.00 per share > B. \$4.20 per share > C. \$4.80 per share

what i am sure about if u gonna convert the preferred ,no div would be paid

For some reason I’m not quite getting this. Could someone please explain further. 1) Dividends are separate, and reported after net income. Therefore if the company is no longer paying the \$20MM in preferred dividends, why is this not added back to net income? i.e. Diluted net income = \$500MM + ( 5MM * \$4 pref. div./shr ) = \$520MM 2) Why is the treasury stock method not being used to determine the number of diluted shares after the conversion of the warrants? i.e. Warrants are convertible at \$25/shr, and outstanding market price is \$50/shr, therefore of the 10MM outstanding warrants, 5MM are bought back \$50/shr. MrE2All Wrote: ------------------------------------------------------- > glitzy Wrote: > -------------------------------------------------- > ----- > > Answer from Schweser is A. \$4 per share. > > > > In the case of convertible preferred, don’t we > > just add back the preferred dividends? > > Should the solution be: > > > > (500mil)/(100mil+5mil+15mil)=\$4.20 > > > > Please help! Thanks! > > Just to clear this up the solution is: > > Dilutive EPS = (500MM)/(100MM + 15MM + 10MM) = > \$4.20 EPS > > 500MM = (500MM - 20MM preferred dividend) + 20MM > preferred dividen > 100MM = common shares outstanding > 15MM = 5MM pref * 3:1 convertible ratio > 10MM = 10MM warrants * 1:1 convertible ratio > > > To check: > > Basic EPS = (500MM - 20MM preferred > dividend)/100MM = \$4.80 > Dilutive EPS is ALWAYS < Basic EPS.

I’m going to bump this in hopes of an answer

i thought you would add pfd dvd to net inc because that no longer has to be paid, and warrants have to be accounted for based on stk trading at \$50