Chartered Financial Analyst (CFA) Level 1 Practice Exam

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What formula is used to determine cash flow per share?

(CFO - preferred dividends) / weighted average number of common shares outstanding
CFO / total outstanding shares
CFO / shares issued
CFO / diluted shares

The correct answer is: (CFO - preferred dividends) / weighted average number of common shares outstanding

The formula used to determine cash flow per share focuses on how much cash flow is attributable to each share of common stock. Cash flow per share is calculated by taking cash flow from operations (CFO) and subtracting any preferred dividends, ensuring that only the cash available to common shareholders is considered. This result is then divided by the weighted average number of common shares outstanding during that period. Using the weighted average number of shares is crucial because it takes into account any changes in the number of shares outstanding due to new issuances or buybacks throughout the reporting period. By focusing on the cash specifically available to common shareholders, this calculation provides a clearer picture of the financial health and cash-generating ability of the company from the perspective of ordinary shareholders. Other choices do not account for preferred dividends, do not consider the weighted average, or misinterpret the share count, leading to less accurate measures of cash flow available on a per-share basis for common stockholders.