- CFA Exams
- CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 21. Understanding Income Statements
- Subject 7. Earnings per Share
CFA Practice Question
On January 1, 2015, the Meery Lunch Co. had 509,000 shares of common stock outstanding. During 2015 it had the following transactions that affected the common stock account.
- February 1: Issued 133,000 shares
- March 1: Issued 10% stock dividend
- May 1: Acquired 114,000 shares of treasury stock
- June 1: Issued a 3-1 stock split
- October 1: Reissued 79,000 shares of treasury stock
Determine the weighted average number of shares outstanding as of December 31, 2015 and then assume that Meery Lunch Co earned net income of $3,456,000 during 2015. In addition, it had 111,000 shares of 9%, $100 par non-convertible, noncumulative preferred stock outstanding for the entire year. Because of liquidity considerations, however, the company did not declare or pay any dividends in 2015. Compute earnings per share for 2015.
A. 1.87
B. 2.27
C. 2.96
Explanation: Jan 1 - Feb 1: 509,000 * 1.1 * 3 * 1/12 = 139,975
Feb 1 - May 1: (509,000 + 133,000) * 1.1 * 3 * 3/12 = 529,650
May 1 - Oct 1: (642,000 * 1.1 * 3 - 114,000 * 3) * 5/12 = 740,250
(1,679,700 + 79,000) * 3 / 12 = 439,675
Total: 1,849,550
EPS= Net income/ weighted average shares = 3,456,000 / 1,849,550 = 1.87
Feb 1 - May 1: (509,000 + 133,000) * 1.1 * 3 * 3/12 = 529,650
May 1 - Oct 1: (642,000 * 1.1 * 3 - 114,000 * 3) * 5/12 = 740,250
(1,679,700 + 79,000) * 3 / 12 = 439,675
Total: 1,849,550
EPS= Net income/ weighted average shares = 3,456,000 / 1,849,550 = 1.87
User Contributed Comments 24
| User | Comment |
|---|---|
| shasha | acquire treasury stock: common stock reduced; reissue treasury stock: common stock increased; noncumumlative preferred stock: dividend is not accumulated, either paid or gone. |
| americade | Computation is wrong in that it assumes that the 79,000 shares of reissued stock was "pre-split" shares, but it occurred AFTER split so the 79,000 shares should NOT be muliplied by "3." The correct answer then is $1.884 *.* |
| danlan | Americade, computation is right. 79000 is multiplied by 3 because it is issued on Oct 1, three months to the end of year, it is not because of stock split. It is then divided by 12, read again and you will understand. |
| aroman21 | How did they get the 1,679,700 number? |
| desertfox27 | 509,000 x 12 months (its been o/s for 1 year) x 1.1 (the stock div) x 3 (the split) divided by 12 (number of months in a year) = 1,679,700. |
| thanks | Why did they not account for the issued stocks (in Feb) and acquired stocks (in May) for the month of Oct - Dec. I have a total of 1,873,775 shares, with EPS = 1.84 |
| rebecca07 | It appears the stock dividend and split included in period. |
| charliedba | thanks: the issued stocks and acquired ones were considered in the calculation. Feb issued stocks: 133,000 * 1.1 * 3. may acquired stocks: 114,000 * 3 (this happened after the stock dividend so there's no 1.1 involved.) |
| micheleus | why not deduct pref. div from 110,000? |
| Drzewes | I think the number 1,679,700 should be 1776600 instead since you always take outstanding shares from prior period (without weight) and then add/substract new issues/repurchases. Before October 1 there were (642,000 * 1.1 * 3 - 114,000 * 3)=1,776,600 shares. Am I wrong? I agree with "thanks" on the outcome of this question. |
| StanleyMo | this should be categorize as hard. |
| wundac | It is Difficult |
| lilbuck7 | I agree with Drzewes... |
| JCopeland | Micheleus, your reasoning is correct. However, please notice that the pref. shares are non cumulative and they choose not to pay a dividend for liquidity reasons. I initally computed the price w/ (net income-pref div)/weight avg shares. My soloution was not an available choice, after reading it a second time I noticed the part about the dividends. Hope that helps. |
| jpducros | I don't like the way they calculate this and prefer the following : Unfortunately, I get the same answer as "thanks" but I can't see where it is wrong. For me EPS = 1,84 (( 509+ 133*11/12) *1,1 - 114*8/12) *3 + 79*3/12 = 1874 3456 / 1874 = 1,84 Anyone ? |
| shiva5555 | easy |
| cleopatraliao | finally got it:D |
| teje | I got a share amount of 1,873,775 and an EPS = $1.84 My answer slightly differed because for the treasury shares repurchased (i.e 114,000) they are affected by the 3-for-1 split only, the 10% stock dividend does not affect this repurchase as it fell after. |
| tushi123 | @jpducrous- u calculated 509 for 11 months whereas it should be for 12 months |
| padasalasunil | @tushi123 no. jpducros did it right. If you see, the 11/12 applies only to the 133k shares and not the 509k |
| gill15 | The 1679700 just blows my mind. I understand they got it from using 509000*1.1*3 ---- BUT WHY are they using... I was using 1776600.... |
| jnissim | This is not a logical explanation nor is it correct. This should be calculated Month by Month. |
| alles | Correct weighted average number of common shares is 1873775 and EPS is 1.84 |
| kingirm | Agree with 18773775. |