CFA CFA Level 1 Diluted EPS

# Diluted EPS

• Author
Posts
• pcunniff
Participant
• CFA Level 1
20

Can someone explain why B is correct here? I dont know how they are calculating the weighted avg shares outstanding. Thanks for the help in advance!

As of the beginning of the year HalfPass Productions, Inc., had the following complex capital structure:

3,000,000 common shares outstanding.175,000 options with an exercise price of \$22.250,000 warrants with an exercise price of \$18.

During the year:

On March 1, the company issued 100,000 new shares of common stock.On July 1, the board of directors declared a 15% stock dividend.On September 1, the company repurchased 125,000 shares.Net income (after-tax) for the year was \$7,500,000.The company paid common dividends of \$2,750,000 and preferred dividends of \$1,300,000.The average market price for the common stock was \$25 per share.

Assume the fiscal year is January 1 through December 31. At year end, HalfPass’s basic EPS is closest to:

A. 1.94

B. 1.77

C. 1.66

Average shares = 42,050,000 / 12 = 3,504,167

Basic EPS = \$6.2 million / 3.504 million = \$1.77

• 5

First, we have to adjust the pre-dividend number of shares to post-dividend number of shares, then weight it:

1st Jan: 3,000,000 * 1.15 = 3,450,000

1st March: 100,000 * 1.15 * 9/12 = 86,250

1st Sep: -125,000 shares (no adjustment need as post stock dividend) * 4/12 = -41,667

Add them all up, I get 3,494,583 weighted avg number of shares.

So basic EPS = (\$7.5m – \$1.3m preferred divs) / 3,494,583 = \$1.77

• 4

Because it is not convertible?

• Yeshank
Participant
• CFA Level 1
3

since its nowhere mentioned that they are convertible and also no conversion ratio has been given i would say that you are correct

• 3

Kaplan’s answer for basic EPS is still correct like mine, \$1.77.

I’m not sure how they arrived at 3,504,167, but I think it is close enough that it didn’t impact the final answer.

• pcunniff
Participant
• CFA Level 1
0

@Sophie so is Kaplans answer wrong then? They have 3,504,167 vs your number of 3,494,583.