Basic EPS Question

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bhhewitt

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Hi All,
I cam across this question and cannot understand why the answer is what it is:
A company has the following sequence of events regarding their stock:
  • One million shares outstanding at the beginning of the year.
  • On June 30th, they declared and issued a 10% stock dividend.
  • On September 30th, they sold 400,000 shares of common stock at par.
Basic earnings per share at year-end will be computed on how many shares?

A)
1,200,000.

B)
1,100,000.

C)
1,000,000.
I picked B because I did ((1.2M Shrs. x 12 months) + (0.4M Shrs. x 3 months))/12 = 1.1M
The answer is A because:
I thought that only preferred dividens are included in EPS calculations so where do tthey get the second line of the explanation from?
Thanks in advance!
 
Adjust the number of pre-stock-dividend shares to post-stock-dividend units by multiplying all share numbers prior to the stock dividend by 1.1
1,100,000*12 = 13,200,000
Shares issued or retired after the stock dividend are not affected
400,000(3) = 1,200,000
14,400,000/12=1,200,000
 
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