A company has the following sequence of events regarding their stock: * One million shares outstanding at the beginning of the year. * On June 30th, they declared and issued a 10% stock dividend. * On September 30th, they sold 400,000 shares of common stock at par. Basic earnings per share at year-end will be computed on how many shares? A) 1,200,000. B) 1,600,000. C) 1,000,000. D) 1,100,000. Your answer: A was correct! 1,000,000(12) = 12,000,000 100,000(12) = 1,200,000 400,000(3) = 1,200,000 Total = 14,400,000 / 12 = 1,200,000 I got the answer correct, but I’m not sure why they multiplied 100k by 12. What is the reasoning behind that?
Prosetti, Here we need to calculate the weighted average number of shares outstanding. 1 million shares outstanding for 12 months initially Then the company issues a 10% dividend after 6 months, so we need to adjust all those outstanding shares issues before this date. The basics to remember here is that Stock dividends involve the issuance of additional shares of stock to existing shareholders on a pro-rated basis. Stock dividends are issued to stockholders of record as of the record date. The dividends are not paid in cash but are paid as additional shares. So for any stock-splits and dividends paid, we need to adjust all of our outstanding shares till date. This is to maintain this figure (number of shares) * (par value per share) So we have 1 million * 10% = 100000 (additional stocks due to dividends) So total shares outstanding since the beginning of the year is = 1 million + 100K = 1.1 million ON Sept 30th, sold 400K shares, so these new outstanding shares are weighted only for the remaining 3 months So total shares outstanding are = (1,000,000 + 100,000)*12 + 400,000*3 = 14400000 Hope, someone has a better explanation than what I have to offer. - Dinesh S
Hi - check LOS 39.c - stock splits and dividends are applied “retroactively” to the begining of the period hence when calculating the weighted average number of shares you multiply by 12 (instead of the number of months to end of year).
Thanks guys.