In the readings it goes " If the number of common stocks increases as a result of a stock dividend or split, the EPS calculation reflects the change retroactively to the beginning of the period" but I’m having trouble understanding the concept. I’ve done a worked exampled below is this correct?
Example:
Net Income: $5 000 000
Number of outstanding shares on the 01/01/2012: 1 000 000
Additional Shares issued on the 01/07/2012: 500 000
2:1 Stock split on the 01/12/2012
Calculate EPS at the end of the year?
To calculate the weighted avg number of shares i did the following (0.5*1 000 000) + (0.5 * 1 500 000) = 1 250 000 but because of the stock split, we take it as if it occurred at the beginning of the period so we double that number to get 2 500 000 shares outstanding. For an EPS of 2.0?
I tried using your reasoning on one of the questions in the CFA readings and I keep getting different answers, here’s the question
Net Income : $2 300 000
Shares outstanding 1 Jan 09: 1 000 000
Shares issued 1 April 09: 200 000
Shares repurchased 1 Oct 09: 100 000
2:1 stock split: 1 Dec 09
Going by your response I went at the time prior to the stock split there were 1 100 000 shares outstanding and then I multiplied that by 2 to get 2 200 00. In the text book they’ve got 2 250 000. Could you please explain how they get 2 250 000