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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? |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
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® 2024 Level I Curriculum, Volume 2, Module 2.