CFA Video: Basic Earning Per Share with Stock Split Exercise
CFA Video: Basic Earning Per Share with Stock Split Exercise
Question:
If a company earns $20k and it pays $1k as preferred stock dividends and $2k as common stock dividends, what is the EPS?
|
1-Jan |
Common Share outstanding |
20000 |
|
|
Preferred Share outstanding |
500 |
|
1-Apr |
Share issued |
4000 |
|
1-Jul |
20% stock dividend |
|
|
1-Sep |
Share repurchase |
6000 |
Answer:
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|
|
The followings are being tested:
l Definition of Basic Earnings Per Share
• This is a simple capital structure. There is no convertible bonds, no convertible preferred stocks etc.
l Earning has to be deducted by preferred share dividends but NOT common share dividends
l Need to know how to calculate the # of shares in the equation
Basic Earnings Per Share
= (Earnings – Preferred Dividends)/ Weighted average of # of common shares outstanding
Note that the common stocks dividends are not deducted.
Weighted number of common stocks outstanding can be found as the following:
|
1-Jan |
Common Share outstanding |
20000 |
20kx1.2×1 |
24000 |
|
|
Preferred Share outstanding |
500 |
Irrelevant |
|
|
1-Apr |
Share issued |
4000 |
4kx1.2×3/4 |
3600 |
|
1-Jul |
20% stock dividend |
|
|
|
|
1-Sep |
Share repurchase |
6000 |
6k/3 |
-2000 |
|
|
Weighted Average |
|
|
25600 |
So the EPS = 19k/25.6k = $0.74/share
it’s good, for it interpret the EPS clearly to the new learners.
It’s a good reminder for the EPS calculation.
maybe I am missing something, but if there are 500 pfd shares paying $1.00 each, shouldn’t the earnings be reduced by $500? Looks like it was reduced by $1000.
the share repurchase outstanding should have been 4 months instead 3, so should be 6000/4 and also the stock dividend should not add to Jan 1 and April 1, because those dividend is only outstanding for half year.
here is my equation for outstanding stock= (20000+4000*3/4+ 4600*0.5- 6000*0.25)
any comments will be appreciated