Hi All,

Basic EPS

I am stucked in this excercise: frown

A company had the following changes in stock:

2,000,000in Shares Outstanding on Dec 31 20X6

March 31, 20X7 company paid a 10%stock dividend

June 30, 20X7 the company sold $10 million face value 7% convertible debentures, convertible into common at $5

September 30, 20X7, the company issued and sold 100,000 shares of common stock

How a dividend affect the Shares Outstanding? and then why in the answer they are doing this:

2,000,000(1.10)+(1/4) (100,000)=2.225

Where is 1/4 coming from?

Thank you in advance. I am looking forward to a good night sleep :slight_smile:


The Owl

Those 100,000 shares were outstanding for 3/12 (= 1/4) of the year: October, November, and December.

  1. “How a dividend affects the Shares Outstanding?”

Becasue it is a “stock dividend”.

So a 10% stock dividend basically says that if you own 100 shares before the 10% stock dividend, after it you have 110 shares.

  1. Where is 1/4 coming from?

“September 30, 20X7, the company issued and sold 100,000 shares of common stock”

The above issue was outstanding for only 3 months (Oct, Nov and Dec) of the Year 2017 = > 3/12 => 1/4

Even though the 10% stock dividend occurs only in Mar 2017, it must be applied to all shares outstanding “prior” to the stock dividend.

Hence you take the # shares outstanding just before the stock dividend = 2 million, 10% of which is 0.2 million, giving the total post the stock dividend of 2.2 million shares outstanding. Or simply 2 million x 1.10 = 2.2 million.

Same principle if it was a stock-split instead - you must apply it to all shares outstanding “prior” to the stock split.

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

So, why did we not apply a fraction to the additional stocks created by the stock dividend that only existed for 3/4 of the year?

If you read the article I cited above, you’ll see.

Short answer: stock splits, reverse stock splits, and stock dividends are retroactive: they change all existing amounts since the beginning of the year. Red shares, blue shares.

That’s right… I had forgotten that piece. Thanks.

Friends, I drink you to you all on this thread. Thank you, this changed the way I look at EPS.

And now, I am going to initiate another thread called Double Declining Depresion, sorry depreciation.

Until very soon and thanks again,

The Owl

My pleasure.

Why do you not pro rate the stock dividend of 200,000 by (9/12) since it was issued March 31 so you had those additional shares for 9 months out of the year?

Hi, anyone knows what should we make of our scores on the CFAI website topic questions? Meaning at what percentage range should we decide to go back to the book or instead move on to another topic. any idea? thank you.