question about eps

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  • #203209
    jorden_rowrow
    Participant

    The following information pertains to Ceil Co., a company whose common stock trades in a public market:

    Shares outstanding at 1/1= 100,000

    Stock dividend at 3/31= 24,000

    Stock issuance at 6/30= 5,000

    What is the weighted-average number of shares Ceil should use to calculate its basic earnings per share for the year ended December 31?

    a. 123,000

    b. 129,000

    c. 120,500

    d. 126,500

    the correct answer is d and my question is how did they get this?

    The way I calculated was: 100,000 * (3/12)= 25,000 3 months until 3/31 + 124,000*(3/12)= 31,000 (3 months until 6/30) + 129,000*1/2 (6 months until you get till december= 120,500. It seems like I am screwing up somewhere, an someone explain it to me

    #783675
    tomtraption
    Participant

    When there is a stock dividend, you increase the shares outstanding into the future and into the past, because we want to keep things apples-to-apples.

    One share before the stock dividend is equal to 1.24 shares after the stock dividend. So, when we calculate the average shares outstanding, we do so on the “1.24 basis” so to speak. So we consider there to be 124k shares outstanding between 1/1 and 6/30.

    So its (100+24) * 6/12 + (124+5) * 6/12 = 126.5

    #783676
    Anonymous
    Inactive

    exam nugget: stock dividends AND stock splits are tereated as if they occurred at the beginning of the year for purposes of weighted average shares outstanding (the denominator of the EPS calculation)

    #783677
    Grey Worm
    Participant

    using your method the formula would look like:

    (100,000 + 24,000) * (6/12) = 62,000
    (100,000 + 24,000 + 5,000) * (6/12) = 64,500
    62,000 + 64,500 = 126,500

    like @eesti said, treat splits and dividends as if they are retroactively applied to the entire year.

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