Problem:
In calculating earnings per share, the equivalent number of convertible preferred shares are added as an adjustment to the denominator (number of shares outstanding). If the preferred shares are cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?
a) Annual preferred dividend, b) Annual preferred dividend times (one minus the income tax rate), c) annual preferred dividend times the income tax rate or d) the annual preferred dividend by the income tax rate.
Why?