Calculation of Basic EPS - What is going on here?

[michaelgrogan]

[original post removed]

[S2000magician]

@michaelgrogan

If I understand correctly, Basic EPS does NOT consider the payment of a cash dividend in the calculation.

The Hall Corporation had 100,000 shares of common stock on May 1. On July 1, the company issued a 10% stock dividend. On September 1, Hall issued 1,000, 10% bonds, each convertible into 21 shares of common stock. What is the weighted average number of shares to be used in computing basic and diluted EPS, assuming the convertible bonds are dilutive?

a) 132000

b) 135000

c) 139000

The attached solution calculates it as follows: {[100000*(12/12)] + [30000*(8/12)]} * 1.10 = 132,000 shares outstanding.

Why are we multiplying by 1.10? I would have thought that we would just calculate {[100000*(12/12)] + [30000*(8/12)]} to get 120,000 shares outstanding. I am really confused on this, so would appreciate any help.

This thing’s wonky. What’s their fiscal year? 1/1 – 12/31, or 5/1 – 4/30? Where’d the 30,000 shares come from?

As to the 1.10, here’s why:

On July 1, the company issued a 10% stock dividend.

I wrote an article on WACSO that may be of some help: http://financialexamhelp123.com/weighted-average-common-shares-outstanding-wacso/.

[michaelgrogan]

Hi,

Sorry, I omitted the fact that 30,000 shares of common stock was issued on May 1. The 100,000 shares was issued at the beginning of the year.

The 1.10 makes sense as it reflects a new number of shares outstanding; I was confusing stock and cash dividends.

Thank you for your help!

[S2000magician]

You’re welcome.