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Hi all,
At first i thought I understood the EPS calculations as it seemed pretty straightforward. After doing the homework, that thought went out the window. The main thing i am confused on is how do you the time weighted period to measure the shares by in order to get the weighted average of shares outstanding? Here are a couple of examples where the methods seem to vary.
1.) Deck Co. had 120,000 shares of common stock outstanding at January 1, Year 2. On July 1, Year 2, it issued 40,000 additional shares of common stock. Outstanding all year were 10,000 shares of nonconvertible cumulative preferred stock. What is the number of shares that Deck should use to calculate Year 2 earnings per share?
Choice “c” is correct. 140,000 shares of common stock is the weighted average for earnings per share. The calculation is as follows:
1-1-Year 2: Outstanding all year $ 120,000
7-1-Year 2: 40,000 issued x 6/12 20,000
Weighted average $ 140,000
I know that this is a fairly easy question but notice that the timing of the first number (120k) is all year and the second 20k is for half of the year. I understand why they got this answer but then when i got another question involving stock dividends, they started adding up the shares together before multiplying them by the time-weighted average. See next example.
Strauch Co. has one class of common stock outstanding and no other securities that are potentially convertible into common stock. During Year 1, 100,000 shares of common stock were outstanding. In Year 2, two distributions of additional common shares occurred: On April 1, 20,000 shares of treasury stock were sold, and on July 1, a 2-for-1 stock split was issued. Net income was $410,000 in Year 2 and $350,000 in Year 1. What amounts should Strauch report as earnings per share in its Year 2 and Year 1 comparative income statements?
Choice “b” is correct. $1.78 and $1.75 EPS Year 2 and Year 1.
Year 2 Year 1
Net income $ 410,000 $ 350,000
Weighted Avg. Shares ÷ 230,000 ÷ 200,000
EPS $ 1.78 $ 1.75
1/1/Year 2 to 4/1/Year 2 – 100,000 x 2 (stock split) X 3/12 = 50,000
4/1/Year 2 to 7/1/Year 2 – 120,000 X 2 (stock split) X 3/12 = 60,000
7/1/Year 2 to 12/31/Year 2 – 240,000 X 6/12 = 120,000
Can someone please explain why they started adding the 20k to the 100k and why they used that specific time period? Going back to the first example, they didnt add the share amounts together and just multipled them for the period outstanding. Is there another way of doing this problem that is consistent with how the first problem is solved? I just need to know if there are certain times where i have to add the shares together first before multiplying them and times when i can just take what they give and multiply by the time-weighted average. I know that the stock split is applied retroactively so i’m good with that part. Just confused on why they started adding the shares together before multiplying them by the time-weighted average. Thanks for any help.
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