New Gestalt, Inc. Basic EPS Calculation | CFA Level 1 Exam Preparation

Calculating Basic EPS for New Gestalt, Inc.

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Question

New Gestalt, Inc., a software firm had a net income of 1.7 million last year. It has 200,000 common shares and 300,000 convertible bonds with face value of 100 outstanding. The convertible bonds carry a coupon of 4% and can be converted one-for-one. The average stock price last year was 39 and the maximum price was 57. The effective interest rate on the convertible debt is 8%. New Gestalt issued 100,000 preferred shares with face value 100 and a coupon of 5% on March

31st of last year. Assume the convertible bonds are dilutive and that New Gestalt faces a 30% tax rate. Given the above, New Gestalt's Basic EPS equals

________.

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A. B. C. D.

C

The preferred dividends = 100,000*5%*100*9/12 = 375,000 (they were outstanding for 9 months). Therefore, Basic EPS = (Net Income - Preferred dividends)/ weighted # of common shares = (1,700,000 - 375,000)/200,000 = 6.62

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