- 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
Suppose that JPK, Inc. paid dividends of $80,000 to its preferred shareholders and $40,000 to its common shareholders during 2015. The company had 20,000 shares of common stock issued and outstanding on 1/1/2015, issued 7,000 more shares on 6/1/2015, and paid a 10 percent stock dividend on 8/1/2015. Assuming that JPK had $150,000 in net income, what is the firm's basic earnings per share (EPS) for 2015?
A. $2.64
B. $2.71
C. $2.91
Explanation: 1/1/15 (22,000 shares adjusted for 10% stock dividend)(12 months) = 264,000
6/1/15 (7,700 shares adjusted for 10% stock dividend)(7 months) = 53,900
Total share month = 317,900 Average shares = 317,900/12 = 26,492 Basic EPS = ($150,000 - $80,000)/26,492 = 2.64
6/1/15 (7,700 shares adjusted for 10% stock dividend)(7 months) = 53,900
Total share month = 317,900 Average shares = 317,900/12 = 26,492 Basic EPS = ($150,000 - $80,000)/26,492 = 2.64
User Contributed Comments 9
| User | Comment |
|---|---|
| armanaziz | 6/1/11 - end of year is 7 months.. not 6 months |
| siggy25 | No armanazi - June, July, Aug, Sept, Oct, Nov, Dec = 7 months |
| julamo | I think that's what he said |
| kenzo | Why did we have to take an average? |
| drew2009 | Basically there are two ways your can calculate it kenzo: First is to you adjust for all dividend payments straight up. Remember you have to adjust all shares for dividends that are outstanding before the dividend is issued. So 20,000(1.1)=22,000 On 6/1 they issued 7,000 more shares. Since the dividend is on 8/1 you much also adjust to 7,000(1.1)=7,700. The next step is to weigh the shares issued during the year. Since they are issued on 6/1 they have life value for that year of (7/12) since they only exist 7 months out of the year. 7,700(7/12)=4,491.67 4,491.67+22,000=26,491.67 (Weighted average shares) |
| MatsevychO | drew2009: great explanation - thx |
| cfastudypl | Alternatively, you may wish to weight the 7,000 shares issued 6/1/2015 as: 7,000* 7/12 = 4,083.3333 + 20,000 = 24,083.333*1.1 = 26,491.6667 which approximates to 26,492 shares. Basic EPS becomes (150,000 - 80,000)/26,492 = 2.6423 which approximates to 2.64 option A. |
| tapasp | any reason why the income available to common share holders is 150,000 - 80,000 ? (i thought it says 40,000 was paid to common shareholders) |
| parkjihoon | if the stock dividend is retroactively applied at the beginning of the year, then it shouldn't have been applied to the 7000 shares issued later in the year (?) does this mean stock dividends apply to stock issued later in the year too? thanks |