CMA Study Group

 there are two questions in the attachment about computing the number of shares outstanding in EPS when there are stock dividends and stock repurchase. the two question is different in dealing with the weight of the stock dividend share number ? which is right and why?

Attachment(s)

stock dividen in EPS.doc   144 KB 1 version

 This is a really good question, and for the life of me I can't figure it out.  The answer doesn't make sense.  Take a look at the schedules below, no matter which way I slice it, I still come up with the same answer 117k share outstanding.  I made reference to my text and to internet documents and followed their processes as I understood them and still came out with 117k shares.  The fractional shares don't add up when you follow the process that equates to 111,750 which again, doesn't make sense, unless there is something I am missing.  Any suggestions?

Now the first thing to understand is that both solutions provided are correct in context of the related questions. For question number 1 it is already mentioned that the 75,000 share are issued as dividend and dividend is usually declared on the profit of the ended year, so these 75,000 shares are already declared for issue and will be included in the calculation of EPS, it is only this matter that they just have been physically issued on March 1. This means that at January 1 there are 150,000 + 75,000 = 225,000 shares outstanding. 

So when we calculate the weighted average we do the following;

1 - 50000 + 75000 (Jan 1 till Oct 31) = 225000 x 10/12 = 187,500 

2 - 225000 + 60000 (Nov 1 till Dec 31) = 285000 x 2/12 = 47,500

Total shares outstanding for EPS calculation = 187,500 + 47,500 = 235,000 (sum of the weighted averages, correct answer)

For question number 2 it is said that the dividend 10% stock is declared and issued on July 1 which is a different situation than question 1. To arrive at the number of share outstanding for EPS calculation we need to do the following;

1 - Shares outstanding at Jan 1 = 100,000.

     Weighted average = 100,000 x 3/12 = 25,000 (Jan 1 - Mar 31)

2 - 10,000 additional shares issued on Apr 1, thus total shares now = 100,000 + 10,000 = 110,000.

     Weighted average = 110,000 x 3/12 = 27,500 (Apr 1 - Jun 30)

3 - On July 1 10% stock dividedd issued making total number of shares = 110,000 x 1.1 = 121,000

     Weighted average = 121,000 x 3/12 = 30,250 (Jul 1 - Sep 30)

4 - On Oct 1 5,000 shares repurchased making outstanding shares = 121,000 - 5,000 = 116,000. (Repurchase is a reduction in outstanding shares)

     Weighted average = 116,000 x 3/12 = 29,000 (Oct 1 - Dec 31)

Sum of weighted averages = 25,000 + 27,500 + 30,250 + 29,000 = 111,750 (this is the correct answer)

I hope that I am able to explain how the answers are calculated and now it is clear for you.

Best regards,

Maqsood A. Qureshi, CMA, CDIF, MBA 

 Thank you so much!  It's all about how the question is written!  If I understand correctly, we are to assume that the stock issue on March 1st is related to the previous year profit distribution (question does not address declaration date only issue) and therefore those related shares are technically outstanding as of the 1st of January.  In the second case the distribution is both declared and issued on July 1st.  This stock issue could be related to the organization's stock price manipulation strategy.  Maybe the company feels the stock price is too high...but whatever the purpose, those shares are outstanding as of the date of their declaration, not the previous year.  Is this analysis correct?

Yes Charlene now you got the idea and your analysis is correct. It is very common in CMA questions to ask things like this such as in question number 1 and this is where your understanding of the subject and quick judgment will be tested. If you see carefully in the first question it is said that stocks issued through dividend, it is not mentioned declared and issued, whereas in the second question they are clearly saying declared and issued. These are the little tricky things which can confuse you during the exams. One thing must be kept in mind that whenever word dividend is used it should be considered related to the closed year unless specified as it is in question number 2.