I ran across the following question in Scwheser. This is a very basic question but given my limited knowledge of equities I am looking for some help: Question: What is the company’s basic earnings per share? Company A has Net Income of $15,000 for the year. 5,000 common shares issued on Jan. 1. 10% Stock Dividend Issued on June 1. 1,000 Common shares repurchased July 1. 1,000 shares of 10%, par $100 preferred stock each convertible into 8 shares common were outstanding the whole year. Solution: $1.00 per share 1/1: 5,500 shares issued (includes 10% stock dividend on 6/1) x 12=66,000 7/1: 1,000 shares repurchased x 6 months = 6,000 66,000 - 6,000 = 60,000 shares 60,000 shares / 12 months = 5,000 avg. shares Preferred dividends: ($10)*($1,000)=$10,000 Basic EPS: (15,000 - 10,000)/5,000 = $1.00 per share MY QUESTION: Avg. Shares Calc. I see why they’d multiply 5,000 shares times 12 months to get the weighted avg. shares for the year. HOWEVER, the 10% stock dividend is ISSUED on 6/1, so how come they multiply this by 12 months as well. Shouldn’t it be x 7 months?? Or are stock dividends retroactive? Any insight into this would be appreicated. Thanks.
Yes, stock dividends, stock splits or stock bonus issues are assumed to have happened on 1st Jan, regardless on when they actually occur throughout the year. Check out LOS 32.h and 32.i for explaination.
Thanks! Went through all of FSA in August. Just getting back to it now. Thanks again.
Hi, Maybe this is useful for you (about basic and diluted EPS) http://minute-class.com/finance/cfa-video-basic-earning-per-share-with-stock-split-exercise/ http://minute-class.com/finance/cfa-video-diluted-earnings-per-share-and-treasury-stock-method/