i dont get this question. I expected this to be a weighted average calculation…what gives? my answer was a guess by the way… The SSP Company had 5 million shares outstanding on January 1. On February 15 the board of directors approved a 3:2 stock split, effective April 1. What is the weighted average number of shares outstanding for the SSP Company for year-end? A) 6,875,000 shares. B) 6,250,000 shares. C) 5,625,000 shares. D) 7,500,000 shares. Your answer: C was incorrect. The correct answer was D) 7,500,000 shares. Stock splits and stock dividends are applied to all shares that existed at the beginning of the period and shares that were issued or repurchased during the period, but prior to the split or dividend. For SSP, the 5 million beginning-of-year shares outstanding are adjusted to 7.5 million shares (5.0 x 3/2) as a result of the 3:2 split.
Confusing,it does actually say weighted average no of shares outstanding… on the basis 3 shares for every 2 would mean an additional 2,500,000 shares As they are issued effectively on April 01, that is 2,500,000 * 9/12 = 1,875,000 Original 5,000,000 + 1,875,000 = 6,875,000 I would have gone for answer A Where is this question from? Always interested to hear if they are actually from CFA or Schweser/|Stall et al, to guage what we may expect!
Stock splits do not change the capital structure of the company, so no change to market cap or equity, etc. Therefore, you just change the number of shares for the company to 7.5 million from beginning of year (and earlier years as well), and that would be your weighted average number of shares outstanding. If the company had issued new shares in a secondary offering to raise more capital, then you would only consider the change from the effective date (as in April 1st in this example), because new investors change the number of shares. With stock splits, there is no additional money coming in.
Dreary is right on the money
stock splits are applied always from beginning of the period, irrespective of when during the year they are approved.
As an additional thought about this, if the company pays a dividend, it has to pay it to 7.5 million shares, not to any other number, because that’s the actual number of shares. But if you want to calculate EPS, which is not money being handed out to anyone, nor is it actual money set aside per share, etc, but rather it is a way of measuring profitability per share (in a statistical sense?) then you need to figure it how many shares were outstanding on every day of the year.