[Mrs 300]

I really want to understand EPS. I get the weighted average cost of CSO – so I’m good w/ the denominator. But it’s the numerator that keep tripping me up. I listened to Ninja Audio, watched Becker lecture and did practice problems. I swear someone is messing with me. This is an example of where I get confused:

1) Peters Corp’s Capital structure was as follows:

Oustanding shares of stock:

Common (yr 1) 110,000 (yr 2) 110,000

Convertible preferred (yr 1) 10,000 (yr 2) 10,000

8% convertible bonds (yr 1) 1,000,000 (yr 2) 1,000,000

During year 2, Peters paid dividends of $3,00 per share on its preferred stock. The preferred shares are convertible into 20,000 shares of common stock. The 8% bonds are convertible into 30,000 shs of common stock. Net income for year 2 was $850,000. Assume the tax rate is 30%. The basic EPS for Year 2 is:

a. $6.31

b. $6.54

c. $7.08

d. $7.45

Answer: d.

Explanation: 850K-30K/110K

I get where the numbers are coming from. BUT, preferred dividends DECLARED (and not paid) are subtracted. Why are these preferred dividends subtracted? There is another example in Becker of dividends that were paid and they did not reduce the calc.

Thanks in advance.

REG - 80 (Becker only)
BEC - 76 (Becker only)
AUD - 71, 76 (Becker only)
FAR - 65, 74, 81! (Becker, Wiley Test Bank, Ninja notes & Audio)

CPA Class of 2012 🙂

[Marc]

When they ask for Diluted Earnings Per Share, Start thinking about how many common stock the bonds or proffered stock could be converted to…

As long as they are only asking about the basic EPS, Forget that they even mentioned that they are convertible to any amount of common stock.

Passed And got my license too ..

[Author]

Replies