Earnings per Share Calculation - Birch Ltd. | CFA Level 1 Exam

Earnings per Share Calculation

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Question

Birch Ltd. had net income for the year of $101,504 and a simple capital structure consisting of the following common shares outstanding:

Months OutstandingNumber of Shares

January "" February 24,000 -

March "" June 29,400 -

July "" November 36,000 -

December 35,040 -

Assume Birch issued a 20% stock dividend on August 1st. In this case, earnings per share (rounded to the nearest cent) were

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A. B. C. D. E.

B

Following is the calculation for the weighted average number of shares outstanding (before the 20% stock dividend):

24,000 X (2 / 12) = 4,000

29,400 X (4 / 12) = 9,800

36,000 X (5 / 12) = 15,000

35,040 X (1 /12) = 2,920

weighted average 31,720

Stock dividends are assumed to have occurred at the beginning of the year. Thus, the weighted average number of shares equals the amount before the stock dividend plus 20% more which is equal to 38,064 (31,720 + 20% X 31,720). EPS equals net income divided by the weighted average number of shares outstanding which is $2.67 ($101,504 / 38,064).

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