CFA Practice Question

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CFA Practice Question

An analyst gathered the following information about a company:

  • 01/01/2015 - 50,000 shares issued and outstanding at the beginning of the year
  • 04/01/2015 - 5% stock dividend
  • 10/01/2015 - 10% stock dividend

What is the company's weighted average number of shares outstanding at the end of 2015?
A. 57,750
B. 52,500
C. 55,000
Explanation: The weighted average number of common shares outstanding is the number of shares outstanding during the year weighted by the portion of the year they were outstanding. Dividends and splits are applied to all shares issued or repurchased and all original or adjusted shares outstanding prior to the split or dividend.

Step 1) Apply the 04/01/2015 dividend to the beginning-of-year shares: Adjusted shares = 1.05 x 50,000 = 52,500.

Step 2) Apply the 10/01/2015 dividend to the adjusted beginning-of-year shares. Adjusted beginning of year shares = 57,750 (= 1.1 x 52,500).

Step 3) Compute the weighted average number of shares: 57,750 x (12/12) = 57,750 shares.

User Contributed Comments 6

User Comment
cwa4 Can someone explain why you use 12/12 for the weighting when that amount of shares was only outstanding for the last three months?
copus Stock dividends are issued out of the treasury of the company, and therefore deemed to have been in existence for the entire year. Think of these shares as being previously unissued and with the stock dividend, these shares are simply reclassified as "issued".
Inf11B But if they were newly issued shares, it would be weighted for the percent of the year they were outstanding, correct?
Boiler5 I see this more of a trick question - what we're REALLY asked here is "what is outstanding stock at year end?", no?
jpducros Boller, if the question were asked as you mentioned, this would be an easy question. Now it is quoted "medium". Of course you don't know the difficulty when you read the question.
endurance Since we're restating the weighted average shares outstanding for a stock dividend to a full year basis, simply apply the first stock dividend, 50,000 x 1.05 = 52,500 and then apply the second stock dividend of 1.1 x 52,500 = 57,750
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