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anajolie23

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Hi All,
Basic EPS
I am stucked in this excercise:
A company had the following changes in stock:
2,000,000in Shares Outstanding on Dec 31 20X6
March 31, 20X7 company paid a 10%stock dividend
June 30, 20X7 the company sold $10 million face value 7% convertible debentures, convertible into common at $5
September 30, 20X7, the company issued and sold 100,000 shares of common stock
How a dividend affect the Shares Outstanding? and then why in the answer they are doing this:
2,000,000(1.10)+(1/4) (100,000)=2.225
Where is 1/4 coming from?
Thank you in advance. I am looking forward to a good night sleep :)
Best,
The Owl
 
Those 100,000 shares were outstanding for 3/12 (= 1/4) of the year: October, November, and December.
 
1) “How a dividend affects the Shares Outstanding?”
Becasue it is a “stock dividend”.
So a 10% stock dividend basically says that if you own 100 shares before the 10% stock dividend, after it you have 110 shares.
2) Where is 1/4 coming from?
“September 30, 20X7, the company issued and sold 100,000 shares of common stock”
The above issue was outstanding for only 3 months (Oct, Nov and Dec) of the Year 2017 = > 3/12 => 1/4
Even though the 10% stock dividend occurs only in Mar 2017, it must be applied to all shares outstanding “prior” to the stock dividend.
Hence you take the # shares outstanding just before the stock dividend = 2 million, 10% of which is 0.2 million, giving the total post the stock dividend of 2.2 million shares outstanding. Or simply 2 million x 1.10 = 2.2 million.
Same principle if it was a stock-split instead - you must apply it to all shares outstanding “prior” to the stock split.
 
So, why did we not apply a fraction to the additional stocks created by the stock dividend that only existed for 3/4 of the year?
 
If you read the article I cited above, you’ll see.
Short answer: stock splits, reverse stock splits, and stock dividends are retroactive: they change all existing amounts since the beginning of the year. Red shares, blue shares.
 
Friends, I drink you to you all on this thread. Thank you, this changed the way I look at EPS.
And now, I am going to initiate another thread called Double Declining Depresion, sorry depreciation.
Until very soon and thanks again,
The Owl
 
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