- CFA Exams
- CFA Level I Exam
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 21. Understanding Income Statements
- Subject 7. Earnings per Share

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**CFA Practice Question**

At the beginning of 2015, Osami Corporation had 1.4 million shares of common stock outstanding and no preferred stock. At the end of August 2015, Osami issued 1.2 million new shares of common stock. If Osami reported net income equal to $7.2 million, what were its earnings per share (EPS) for 2015?

A. $3.33

B. $2.77

C. $4.00

**Explanation:**Basic EPS = earnings available to common shareholders divided by the weighted average number of common shares outstanding. With no preferred shareholders, all net income is available to the common shareholders. The weighted average number of shares outstanding equals the original 1.4 million shares plus 4/12 of the additional 1.2 million shares. The 4/12 weighting on the new shares is because the new shares were only outstanding 4 months of the year. Thus, the weighted average number of shares outstanding is [1.4 + (4/12)(1.2)] million = 1.8 million shares. So, basic EPS = $7.2 million / 1.8 million = $4.00.

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**User Contributed Comments**
4

User |
Comment |
---|---|

spillo |
How do you get 4/12? |

cleopatraliao |
From 31 Aug-31 Dec=4 months so 4/12 :D |

nguyenluan |
I think we have to add the number of new shares issued to the outstanding number of shares and the weigh them by multiplying by 4/12 ? So by August, there are altogether 1.4+1.2=2.6 million shares outstanding, not 1.2m. Can someone explain? |

Benbracey |
You had 1.4m shares over the whole year, so multiply by 12/12 i.e. multiply by 1, you get 1.4m. You only had 1.2m shares for 4/12 of the year (sept-dec) so take 1.2m * (4/12) = 0.4m. 1.2m + 0.4m = 1.8m weighted shares. |