Basic EPS

Suppose that JPK, Inc., paid dividends of $80,000 to its preferred shareholders and $40,000 to its common shareholders during 2004. The company had 20,000 shares of common stock issued and outstanding on 1/1/04, issued 7,000 more shares on 6/1/04, and paid a 10 percent stock dividend on 8/1/04. Assuming that JPK had $150,000 in net income, what is the firm’s basic earnings per share (EPS) for 2004? A) $2.64. B) $2.71. C) $2.91. D) $4.15.

A January 1st to June 1st: 5/12 * 20,000(1.1) June 1st to August 1st: 2/12 * (20,000 + 7000)(1.1) August 1st to December 31st: 5/12 * 27,000(1.1) The weighted average number of common shares should be 26,492. The net income used to calculate EPS is the net income available to common shareholders (I think), which is 150,000 - 80,000 = 70,000. 70,000 / 26,492 = 2.64

Agree with Yickwong answer A

Thanks Yickwong for your explantion.

another way of calculating the WASO 1/1 20000 * 1.1 * 12/12 = 22000 6/1 7000 * 1.1 * 7/12 = 4492 Total = 26492 Same answer as above.

answer is A. to calc WASO, i always write them in sequential order: 20,000 + 7000 (7/12) |_________________| x 1.1

Can someone elaborate a bit on that factor of 1.1? I am confused why the 10% dividend payment affects the weighted average number of common shares. I can see why when the number of shares outstanding changes from 20k to 27k that this must be weighted properly, but I don’t see why the 10% dividend payment affects this weighted average. Also - another thing that confuses me is the date of the dividend. Since all three time periods (before the addition of 7000 shares, and the intermediate time before the dividend payment) are being multiplied by 1.1 in the WASO, then that 10% dividend pay date shouldn’t matter, right?

a stock split influences everything that happens before the stock split, up to the begining of the year.That would be the starting balance, stock issued before the split etc. anything that happens after the stock split is not influenced by it.So basically you can call it an adjustment

Thanks florinpop. So if the dividend payment occured before the split, say on April 1 instead, what would the WASO be in that case?

Sorry i wasn’t paying attention it’s not a split but a stock dividend which means that you have to adjust everything that happend before by 1.1. Same explanation but change stock split with stock div.Makes sense that all stock outsanding before the dividend would receive this div