Dear All- Need some clarification regarding how will the share repurchase affect weighted avg no of shares (WANS) if done before declaring stock dividend.
Jan1 - Share issued & Outstanding at beginning of yr- 10000
Apr 1- Share issued - 4000
Jul 1- Share repurchased by treasury - 3000
Sep 1- Stock dividend of 10%
Compute the WANS during the year
Please guide. Your help is appreciated
Thanks
Stock dividend is 10% of the number of shares as of Jul 1?
If that is the case you have
0.25(10000) + 0.25(14000) + 0.25(11000) +0.25(12100) = 11,775
Unfortunately, that’s incorrect (and likely to lead Level I candidates astray, or, at least, confuse them further).
Create a time line: you had 10,000 ( old ) shares outstanding for three months (1/1 to 4/1), 14,000 ( old ) shares outstanding for three months (4/1 to 7/1), and 11,000 ( old ) shares outstanding for six months (7/1 to 12/31). Later, (on 9/1, though the exact date _ doesn’t matter _ (i.e., doesn’t appear in the calculation); it could have been any date from 7/2 to 12/31: after the last transaction and on or before the end of the year) each old share was replaced with 1.1 _ new _ shares, so we revise the time line: you had 11,000 (_ new ) shares outstanding for three months (1/1 to 4/1), 15,400 ( new ) shares outstanding for three months (4/1 to 7/1), and 12,100 ( new _) shares outstanding for six months (7/1 to 12/31).
Properly, then, it’s 0.25(11,000) + 0.25(15,400) + 0.5(12,100) = 12,650.
Take a look at the article I wrote on this: http://financialexamhelp123.com/weighted-average-common-shares-outstanding-wacso/.
^ I don’t quite follow, but I trust S2000 advice over mine.
Draw out a time line.
And remember that a stock dividend (or a stock split, or a reverse stock split) does nothing more than change all of the previous numbers retroactively. It doesn’t cause any change in the numbers as of the date of the dividend; there is, effectively, no transaction on the date of the dividend.
If you look at the article I quoted, above, you’ll see lots of pretty colors; I think it makes the whole tedious process fairly clear.
Another way I taught myself to do this, apart from S2000’s method, is this:
You see, Jan 1 stocks are good for 12 months out 12, so 10,000 X (12/12) = 10,000
Similarly, Apr 1 stocks are good for 9 months out of 12, so 4000 X (9/12) = 3000
July 1 stocks are good for 6 months out of 12, so -3000 X (6/12) = 1500
So, you have 10,000 + 3000 - 1500 = 11,500.
Now we have a 10% dividend, so you multiply 11,500 by 1.1 = 12650.
I think it is just a matter of picking a method that works for you and do tons of practice problems so that you get to a point where the process becomes automatic.
If I remember it correctly, I got this method out of schweser videos.
Hope it helps
Thanks to all of you for the pain you to took make me understand the concept.
Magician - your article helps a lot in simplifying things
That’s also a valid approach. In the article I cited, I cover both methods; some people like one, some people like the other.
Good to hear. That’s the goal.