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Question on basic earnings per share

The following data pertains to the McGuire Company:

Net income equals $15,000
5,000 shares of common stock issued on January 1st
10 percent stock dividend issued on June 1st
1000 shares of common stock were repurchased on July 1st
1000 shares of 10 percent, par $100 preferred stock each convertible into 8 shares of common were outstanding the whole year
What is the company’s basic earnings per share (EPS)?

A) $2.5.

B) $1.5.

C) $1.0.

D) $1.2

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C) $1.0.

Same for me
= (15 000 - 10 000)/(5500 - 550) = $1.01

550?

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these shares:
1000 shares of common stock were repurchased on July 1st

You need to account for the fact that they were repurchased part-way through the year, and you also need to account for the stock dividend (even though it occured prior to the repurchase)

so -1000 * 6/12 *1.10 = -550

Are you certain about the fact that we need to account for the stock dividend even though it happened BEFORE the repurchase?! I’m looking at my Schweser book right now and reading this from page 63 of book 3:

SHARES ISSUED OR RETIRED AFTER THE STOCK DIVIDEND ARE NOT AFFECTED.

I’m confused, could someone clarify this please? There’s even an example in the Schweser book on the same page and they do not alter the shares repurchased after the stock dividend.

Thanks.

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hey I could be wrong :-) it wouldn’t be the first time!

let me check out the books too

I just need to clarify it, it isn’t the best feeling being wrong on something like this so close to exam day. Thanks for the input though.

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I think you are correct that the stock dividend is not included for transactions after the dividend.

Though CFAI text on pg 172 of Book 3 only mentions retroactive application of splits/dividends etc

found this:

The weighted average number of shares outstanding during the period constitutes the basis for the per share amounts reported. Shares issued or purchased during the period affect the number of outstanding shares and must be weighted by the fraction of the period they are outstanding. When stock dividends or stock splits occur, computation of the weighted average number of shares requires restatement of the shares outstanding before the stock dividend or split (they are assumed to have been outstanding since the beginning of the year). If a stock dividend or stock split occurs after the end of the year, but before the financial statements are issued, the weighted average number of shares outstanding for the year (and any other years presented in comparative form) must be restated.

I think I’m losing it… look at example 14 on page 173 in the CFAI Book 3. Please tell me it’s done wrong because I do not understand how they got 1,125,000 as the number of shares outstanding…

I think it should be 1,116,667.

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No, 1,125,000 is correct.

There were no share splits or share dividends or anything

it’s simply

1 000 000 * 12/12 = 1 000 000
200 000 * 9/12 = 150 000
-100 000 * 3/12 = -25 000

= 1 125 000

I see it now; like an idiot, I thought the time period from Oct. 1 to Dec. 31 was 4 months. Wow, I hope that doesn’t happen on exam day. Cheers man.

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http://www.analystforum.com/phorums/read.php?11,858946,859810#msg-859810

here we go, read this post - look for map1’s comment about halway down:

Re: basic EPS problem
Posted by: map1 (IP Logged) [hide posts from this user]
Date: November 10, 2008 11:24AM

If what you’re asking is “do you have to adjust a stock issue if later during the year a stock split/dividend occurs?” the answer is yes.

If what you’re asking is “do you have to adjust a stock issue if a stock split/dividend already occurred?” the answer is no.

– sorry for confusing you chad17! At least this one will stick in our minds now!

Why, in the calculation listed by posters above, is the net income shown as 15,000 - 10,000? Where does the 10,000 come from that you are subtracting from net income?

10,000 dividends to preferred stock (10% of $100 par * 1,000 shares preferred stock). It must be deducted from Net Income in EPS calculation since that dividend is not available to common stockholders.

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newsuper,

No worries mate, cheers for that link. But what do you reckon is the answer to this one? I get $1.11.

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chad17 Wrote:
——————————————————-
> 10,000 dividends to preferred stock (10% of $100
> par * 1,000 shares preferred stock). It must be
> deducted from Net Income in EPS calculation since
> that dividend is not available to common
> stockholders.

Ahhh….duh! Thanks, I missed that somehow…

No, I get $1 now

(15 000 - 10 000)/(5 500 - 500) = 1

lordy I thought I knew this stuff

haha, you’re right mate.. i’m sorry, i see it now.. long night.. i’ve been working on ethics, econ and portfolio management for 10 hours straight.. f***ing knackered. tomorrow is another day!

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