CMA Study Group

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  • 1.  EPS Part 2

    Posted 09-08-2022 12:35 AM
    For the year ended May 31, Year 2, a company had per-share earnings of $4.80. The company's outstanding stock for the Year 1-Year 2 fiscal year consisted of $2,000,000 of 10% preferred with $100 par value and 1,000,000 shares of common. On June 1, Year 2, the common stock split 3 for 1, and the company redeemed one-half of the preferred stock at par value. The company's net income for the year ended May 31, Year 3, was 10% higher than in Year 2. Earnings per share in Year 3 on the company's common stock were

    Ans : 1.80
    Explanation to this answer states adding of preference dividend to NI , but no where in the question suggest pref share was cumulative or dividend was paid. Could someone explain why pref dividend was added to NI?

    Explanation as given : The EPS for Year 2 of $4.80 indicates a net income available to common shareholders of $4,800,000. Dividends on preferred stock would have been $200,000 ($2,000,000 × 10%). Thus, the net income must have been $5,000,000. A 10% increase for Year 3 would result in net income of $5,500,000. Only $100,000 ($1,000,000 × 10%) would be required for preferred dividends in Year 3, leaving $5,400,000 for common shareholders. After the 3-for-1 split, EPS would be $1.80 ($5,400,000 ÷ 3,000,000 shares).

    Kirti Sheth

  • 2.  RE: EPS Part 2

    Posted 09-08-2022 01:52 AM
    Preference dividends are assumed to be paid regularly unless told otherwise that's why investors invest in them you should have read that in text books.

    Zahid Ullah Aziz

  • 3.  RE: EPS Part 2

    Posted 09-08-2022 02:08 AM
    Hi Zahid, 

    As far as I know pref dividend does take precedence over equity sh holder but the dividends aren't guaranteed and are subject to board of directors approval, unless its a cumulative type where dividends even not declared or paid has to be accumulated. The reason why its preferred is due to reduced investor risk as it guarantees fixed dividend.

  • 4.  RE: EPS Part 2

    Posted 09-08-2022 02:30 AM
    Practically they are regularly paid just like interest if company doesn't pay preference dividend regularly it will have negative effect on credit rating and nobody would invest in their preference dividends even though they are decided by directors but in exam you need to assume they are paid unless told otherwise because they are paid regularly.

    Zahid Ullah Aziz