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Free CMA Exam Braindumps (page: 149)

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In calculating diluted earnings per share when a company has convertible bonds outstanding, the number of common shares outstanding must be <List A> to adjust for the conversion feature of the bonds, and the net income must be <List B> by the amount of interest expense on the bonds, net of tax
List A List B

  1. Increased Increased
  2. Increased . Decreased
  3. Decreased Increased
  4. Decreased Decreased

Answer(s): A

Explanation:

The weighted-average number of shares outstanding must be increased to reflect the shares into which the bonds could be converted. Also, the effect of the bond interest on net income must be eliminated. In this way, earnings per share is calculated as if the bonds had been converted into common shares as of the start of the year.



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All else being equal, a company with a higher dividend-payout ratio will have a <List A> debt-to-assets ratio and a <List B> current ratio.
ListA ListB

  1. Higher Higher
  2. Higher Lower
  3. Lower Higher
  4. Lower Lower

Answer(s): B

Explanation:

A company with a higher dividend payout ratio is distributing more of its earnings as dividends to common shareholders. It will have less Cash and less total assets than a comparable firm with a lower payout ratio. The debt-to-assets ratio will be higher because total assets are lower, and the current ratio will be lower because cash is lower.



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Alberto Corp. has common and preferred shares outstanding with the following characteristics:


Alberto Corp. has earnings per share of

  1. $2.67
  2. $3.33
  3. $4.00
  4. $5.00

Answer(s): C

Explanation:

EPS equals the income available for distribution to common shareholders divided by the number of common shares outstanding, or $4.00 [($250,000 NI - $50,000 preferred dividends) ÷ 50,000 common shares]



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Presented below are partial year-end financial statement data for companies A and B.


If Company A has 60 common shares outstanding, then it has a book value per share, to the nearest cent, of

  1. $1.67
  2. $2.50
  3. $4.17
  4. $5.00

Answer(s): C

Explanation:

The book value per share for Company A equals the sum of common stock and retained earnings, divided by the number of shares, or $4.17 [($100 + $150) ÷ 60].






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