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Basic Question 7 of 40
On December 31, 2015 and 2014, Linda Corp. had 100,000 common shares and 10,000 $5 no-par-value cumulative preferred shares outstanding. No dividends were declared on either the preferred or common shares in 2015 or 2014. Net income for 2015 was $400,000. For 2015, earnings per common share amounted to ______.
B. $3.50
C. $3.00
A. $4.00
B. $3.50
C. $3.00
User Contributed Comments 15
| User | Comment |
|---|---|
| kalps | Cumulative therefore need to subtract the amount payable in future - matching principle |
| cbb1 | It's $5 per preferred stock dividend on no-par preferred. Thus, the dividend is $5 times 10,000 shares. Key is that if cumulative deduct even if not paid; but if not cumulative do not deduct if not paid. |
| mtcfa | If it's cumulative, wouldn't the 2011 dividend eventually have to be made up as well? Therefore the dilutive effect would be $100,000 form the preferred stock, resulting in a $3 eps. |
| sarath | No the cumulative dividend is noted of the current year only....no arrears... |
| bokica | the 50.000 should have been decleared |
| nagri | Cumulative -- Declared or not declared take the current year portion -- don't consider the past arrears Non-cumulative - take current year only IF DECLARED |
| viannie | cumulative, so even if it's not paid out in 2012, it'll be paid out in the future. Therefore in the calculation, we still have to take it into consideration. |
| georgek | preferred shares mean that these individuals will get dividend before the common shareholders do. if they weren't declared in 2010, 2011, they are still owed the $5 from each period. However, that $5 is "taken" IN THAT period, and doesn't mean it is all subtracted from 2012. In other words, the company still owes another $10 before common guys get their dividend and will be made up at some future point. |
| fmhp | Preferred stock can either be cumulative or noncumulative. A cumulative preferred stock requires that if a company fails to pay any dividend or any amount below the stated rate, it must make up for it at a later time. Dividends accumulate with each passed dividend period, which can be quarterly, semi-annually, or annually. When a dividend is not paid in time it is said that the dividend has "passed" and all passed dividends on a cumulative stock is a dividend in arrears. A stock that doesn't have this feature is known as a noncumulative or straight[5] preferred stock and any dividends passed are lost forever if not declared. |
| Saxonomy | Remeber, the cumulative dividends of $50,000 at end of 2011 was included in 2011's EPS. No need to include it in 2012's EPS. Calculation should be: **Net Income for 2012** divided by **Any "changes" in the firm's cumulative dividend** |
| ppboi16 | Good Question! |
| ColonelCFA | tricky |
| TheProfet | All unpaid dividends owed to the preferred shareholders should be subtracted [400,000 - (50,000 * 2)]/100,000 = 3 Only income available to common shareholders belongs in the numerator. |
| TheProfet | Checked notes again.... Only current preferred dividends are subtracted. 3.50 is correct. |
| nbazilev | I don't understand why the denominator is 100,000 - can someone help? |
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Learning Outcome Statements
describe how earnings per share is calculated and calculate and interpret a company's basic and diluted earnings per share for companies with simple and complex capital structures including those with antidilutive securities
CFA® 2025 Level I Curriculum, Volume 2, Module 2.