Free Online CFA Level 1 Mock Exam 3


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10. Pardew Jewels has 340,000 shares of common stock and 45,000 shares of preferred stock, with a dividend of $10 per share, each of which is convertible into one share of common stock. Each share of preferred stock is convertible into one share of common stock, and in 2008, the company’s net income was $2.1 million.

What is the diluted EPS reported in the company’s financial statements?

A. 4.85

B. 5.45

C. 6.18

Correct Answer: A

Answer Explanation:

Diluted earnings per share = Net income / (weighted number of shares outstanding + new common shares)

Diluted earnings per share = 2,100,000 / (340,000 + 45,000) = 5.45

Basic Earnings per Share = Net Income – Preferred Stock Dividends / (Weighted Number of Shares Outstanding)

Basic earnings per share = (2,100,000 – 450,000) / 340,000 = 4.85

Reported diluted earnings per share is equal to basic earnings per share because diluted earnings per share exceeds basic earnings per share.

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