Basic EPS Question

CFA Level I FRA
#1

Hi All,

I cam across this question and cannot understand why the answer is what it is:

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) 1,100,000. C) 1,000,000.

I picked B because I did ((1.2M Shrs. x 12 months) + (0.4M Shrs. x 3 months))/12 = 1.1M

The answer is A because:

I thought that only preferred dividens are included in EPS calculations so where do tthey get the second line of the explanation from?

Thanks in advance!

#2

Adjust the number of pre-stock-dividend shares to post-stock-dividend units by multiplying all share numbers prior to the stock dividend by 1.1

1,100,000*12 = 13,200,000 Shares issued or retired after the stock dividend are not affected

400,000(3) = 1,200,000

14,400,000/12=1,200,000

#3

I wrote a couple of articles that may be of some help on this:

#4

Thank you both!

#5

My pleasure.