Question 1

Alpha Corp. has the following capital structure during Year 1:
- Net Income: $800,000
- Weighted Average Common Shares Outstanding: 100,000
- 5,000 shares of 6% Cumulative Preferred Stock, $100 par, convertible into 20,000 common shares. No dividends were declared.
- $1,000,000 of 4% Convertible Bonds, convertible into 30,000 common shares.

Tax rate is 25%. What is Diluted Earnings Per Share (EPS)?

Accepted Answer

1. Calculate Basic EPS (NI - Pref Div) / WACSO. Note: Cumulative Pref Divs are subtracted even if not declared. 2. Calculate 'If-Converted' effects for each security. 3. Rank from most dilutive to least. 4. Add to numerator/denominator cumulatively to find Diluted EPS.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Forgetting to tax-effect the bond interest add-back; forgetting to subtract cumulative preferred dividends for Basic EPS when not declared.

How to approach this question

Full Answer

Common mistakes

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