A question from Schweser: A firm had the following numbers of shares outstanding during the year: Beginning of year 8,000,000 shares Issued on April 1 750,000 shares Paid stock divided of 20% on July 1 Issued on October 1 100,000 shares Purchased Treasury stock November 1 1,000,000 shares Split 2 for 1 on December 31 Based on this information, what is the weighted number of shares outstanding for the year? A) 20,783,333. B) 42,444,444. C) 36,222,222. D) 20,266,667. The correct answer was D) 20,266,667. Outstanding all year 8,000,000 × 1.2 × 2 × 1.0 = 19,200,000 Outstanding for 0.75 years 750,000 × 1.2 × 2 × 0.75 = 1,350,000 Outstanding for 0.25 years 100,000 × 2 × 0.25 = 50,000 Retired for 2 months -1,000,000 × 2 × (2/12) = –333,333 Weighted average number of shares for year: 20,266,667 I don’t understand 1.2 in the first two numerators… Please help me… Thanks
The 1.2 is just the stock dividend of 20%. If you buy a stock at $10, and it increases 20%, it is now worth $12, which is $10 plus .20*$10, or $10*1.2. It’s the same as (800,000 + (800,000*.20))*2*(12/12) original + stock dividend *split * 1year
Ok… but why in the weighted number of shares outstanding I have to take into account dividends? I don’t buy new stocks with that dividends… Thanks
It is a stock dividend… It is paid out as stock, not cash. Therefore it increases the number of shares outstanding.
Ok… thanks a lot…