CMA Study Group

CMA Part 1 - Exercise Question #101715

  • 1.  CMA Part 1 - Exercise Question #101715

    Posted 13 days ago

    At December 31, 20X1 and 20X0, Gravin Corporation had 90,000 shares of common stock and 20,000 shares of convertible preferred stock outstanding, in addition to 9% convertible bonds payable in the face amount of $2,000,000. During 20X1, Gravin paid dividends of $2.50 per share on the preferred stock. The preferred stock is convertible into 20,000 shares of common stock. The 9% convertible bonds are convertible into 30,000 shares of common stock. Net income for 20X1 was $970,000. Assume an income tax rate of 40%.

    How much is the diluted earnings per share for the year ended December 31, 20X1?

    Answers:

    a) 7.70
    b) 8.21
    c) 9.35
    d) 10.22





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    Xabier Sarmiento Aznar
    Madrid, Spain
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  • 2.  RE: CMA Part 1 - Exercise Question #101715

    Posted 13 days ago
    Hello Xabier,

    When calculating the diluted earning per share we have to do the following adjustments to normal EPS formula:

    • Convertible Bonds:
    1. Increase the weighted average common shares outstanding amount by adding 30,000 shares
    2. Increase the net income (numerator) by the amount of the after-tax interest saved: $2,000,000 x 9% x (1 - 40%) = $108,000
    • Convertible Preferred Stocks:
    1. Increase the weighted average common shares outstanding amount by adding 20,000 shares
    2. Preferred dividends are no longer subtracted from net income (Because no more preferred stocks in this dilution, all converted into common stocks)

    Diluted Earnings Per Share = $970,000 + $108,000 / (90,000 + 30,000 + 20,000) = $7.70

    Kindly note the followings:
    • The conversion ability is the key concept to drive the diluted EPS formula.
    • Normal preferred socks >>> Subtract dividends from net income ... Convertible >>> Ignore dividends
    • Paid dividends of $2.50 for preferred stocks during 20X1 is not relevant to solution. (Misleading info)
    • There is some hints to ignore preferred stocks dividends ?? No par value, No $ amount, No interest rate.
    • Even assuming $100 par value will not give the real interest % according to $2.50 dividend paid.

    Hope this will be clear & helpful.

    Kind regards

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    Samer Ahmad, FMVA, SCA
    Kuwait
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  • 3.  RE: CMA Part 1 - Exercise Question #101715

    Posted 12 days ago
    Hi Samer,
    Great solution.  VERY practical tips on how to address the elements of the MCQ which is needed to fully grasp a concept in order to not be mislead with unnecessary information.  

    Do you have any tips for someone taking Part I in July who has never gotten an equivalent units MCQ right?
    Best,
    Joseph