Basic EPS # of shares outstanding Question

This is from Schweser Book 6 Exam1 PM # 51 Company had 2 million shares outstanding on Dec 31, 2006 On March 21, 2007, the company paid a 10% stock dividend. On June 30, 2007, company sold $10mill face value of 7% convertible debentures, convertible into common $5 share. On September 30, 2007, the company issuded and sold 100,000 shares of common stock. The company should compute its 2007 basic EPS based on : A. 2,225,000 shares B. 2,250,000 shares C. 3,225,000 shares D. 3,250,000 shares I do not agree with a small part of the answer. So just wondering what you guys think the answer is? Can someone explain how they would use the stock dividend part of the answer…

(2*1.1)*6/12 + (2*1.1 + 2)*3/12 + (2*1.1 + 2 + 0.1)*3/12 1.1+1.05+1.075=3.225

A)2,225,000 1.1*2 + 3/12 * 100,000= 2,225,000

oops i was wrong

answer should be A Stock dividend and splits are adjusted from the beginning of the year: 2*1.1*9/12+(2*1.1+0.1)*3/12=2.225 (millions) 2 million shares adjusted for the stok dividend (*1.1) outstanding from Jan-Sep(9/12)+(stock existent at Oct1(2*1.1)+ stock issued at Sep30 (0.1))outstanding Sep-Dec=2.225

How some dividend stock doesn’t only kick in when it is issued? How come it gets counted from the beginning? Is it because that earning is made through the past year? That’s the bit that trips me up. Thanks!

stock dividends and stock splits are ALWAYS counted as if existing at the beginning of the period, and that’s a rule I’m not able to argue:))

I can argue for splits since the stocks always existed. So if i have one share at the beginning of the year, and it splits 2 for 1 - I will have 2 shares at the end independent of the split date. Dont understand dividends though.

independent, but half the value at the beginning of the period

I find it helps to make a timeline, then as a first step resolve the dividend or stock split, and just work with the new totals.

though we are calculating avg shares, the term average is more to calculate any new/treasury stocks… what it wants to do is calculate EPS. For stock splits the shares existing even at the beginning at the year, but as one share and later it is 2 shares - with the same value though.

I will not argue and just accept the fact that you that all dividend stocks will count from the beginning of the period. Thanks.

You have a piece of land you decided to split in half and give your two sons one half each, on Jan 1. The land is worth $100k. In September, you get a daughter and you decide to split the land into three lots, giving each child one third of the land. The land is still worth $100k. The average price of each lot is? Here, it is clear that the number of lots to use is 3 for the entire year because each lot (as we know it today) is worth $33,333, whether at beginning, middle, or end of year. One third of the land is worth $33,333 at any time.