When computing the Basic EPS, don’t we have to account for the weighted average outstanding shares? I’ve just seen an exercise on Schweser where it does not account for the time-difference of a 10% stock dividend paid on March, 31st.
So let’s say you have 2,000,000 shares outstanding on January 1st, and a 10% stock dividend is paid on April 1st. Nothing else. For me the WACSO would be 2,000,000 (outstanding the whole year) + 200,000*9/12 (outstanding 9 months out of 12). Opinions?
My mistake: stock dividend. (Although, there is no fundamental difference between a stock split and a stock dividend: a 10% stock dividend is really just an 11:10 stock split.)
When I say it’s retroactive, I mean that you need to change all of the outstanding shares numbers from the beginning of the year to the date of the split/dividend.
Suppose that you had 100,000 shares outstanding on 1/1/XX, you issued 10,000 shares on 3/1/XX, you bought back 20,000 shares on 7/1/XX, and you had a 10% stock dividend on 9/1/XX. Because of the dividend, you change all of the previous numbers:
In my mind, the easiest way to think about it is to imagine that the shares are colored: red, blue, green, whatever. Every time the company deliberately changes the value of the outstanding shares – stock split, reverse stock split, stock dividend – imagine that they’re trading one color of stock for another:
A 3:1 stock split gives you three shiny, new red shares for each dull, old green share that you used to own
A 1:5 reverse stock split gives you one shiny, new purple share for every five old, dull yellow shares that you used to own
A 10% stock dividend gives you eleven shiny, new blue shares for every ten old, dull orange shares that you used to own
When a company issues or buys shares, they’re monochrome: the latest color outstanding. When they compute WACSO so that they can compute EPS, they compute the weighted-average _ monochrome _ (last color outstanding) common shares outstanding (WA_ M _CSO?). Therefore, every time there’s a color change, they have to grab their crayons and recolor all of the old shares so that they can do a monochrome calculation at year’s end.
As of an e-mail I received late this morning, I’m apparently allowed to do this: here’s a link to an article I wrote about WACSO (it has colors and everything, and, I hope, will make this clearer):