Diluted EPS no idea

CFA Level I FRA
#22

Do you have a question?

#24

Sorry. Ignore me.

I’m supposed to be on holiday today.

#26

Hey there! I ran into this today running through the practice questions. I cant figure out why in one scenario we would subtract preferred dividends in the diluted EPS calculation but not in another. Its extremely frustrating to know the formula but not get the questions right because of how they are worded. I couldnt quite understand the answer above because they both “paid” preferred dividends… Maybe you would be able to elaborate. I appreciate the help! Here is the info:

Scenario one that calls for subtracting preferred dividends:
For its fiscal year-end, Calvan Water Corporation (CWC) reported net income of USD12 million and a weighted average of 2,000,000 common shares outstanding. The company paid USD800,000 in preferred dividends and had 100,000 options outstanding with an average exercise price of USD20. CWC’s market price over the year averaged USD25 per share. CWC’s diluted EPS is closest to:

Second Scenario that does not call for preferred dividends to be subtracted:
For its fiscal year-end, Sublyme Corporation reported net income of USD200 million and a weighted average of 50,000,000 common shares outstanding. There are 2,000,000 convertible preferred shares outstanding that paid an annual dividend of USD5**. Each preferred share is convertible into two shares of the common stock. The diluted EPS is closest to :

#27

Scenario 1:
The preferred shares are NOT convertible. They are just normal preferred shares
So when calculating Basic EPS and diluted EPS
Earnings attributable to common s/holders = Net Income - Preferred = 12 - 0.8 = 11.2

Scenario 2
The preferred shares ARE convertible
When calculatin Basic EPS
Earnings attributable to common s/holders = Net Income - Preferred = 200 - 10 = 190
But when calculatin gdilued EPS we assume they are converted into ordinary shares and thus the pref. dvd would not longer be relevant
Earnings attributable to common s/holders (assuming conversion) = Net Income= 200

PS can I suggest yu post answers with questions as sometimes there are errors in solutions and we can maybe spot them.

#28

Hey Mikey! Thank you for the clarification. I did not consider the fact that we might not subtract out the preferred dividend if the shares are not convertible. That must be the reason and I feel better. I apologize for not including the answer choices, I ran out of room. Here they are for posterity. The first problem tells you that “its assumed the dividend isnt paid” in the solution they give, but it doesnt say why its doing that.

For its fiscal year-end, Sublyme Corporation reported net income of USD200 million and a weighted average of 50,000,000 common shares outstanding. There are 2,000,000 convertible preferred shares outstanding that paid an annual dividend of USD5. Each preferred share is convertible into two shares of the common stock. The diluted EPS is closest to:

  1. USD3.52
  2. USD3.65
  3. USD3.70

For its fiscal year-end, Calvan Water Corporation (CWC) reported net income of USD12 million and a weighted average of 2,000,000 common shares outstanding. The company paid USD800,000 in preferred dividends and had 100,000 options outstanding with an average exercise price of USD20. CWC’s market price over the year averaged USD25 per share. CWC’s diluted EPS is closest to:

  1. [A.USD5.33]
  2. [B.USD5.54]
  3. [C.USD5.94]