At January 1, 2017, Ecru Corporation had 300,000 common shares outstanding (no preferred shares have been authorized or issued). On March 1, the corporation issued 45,000 new shares to raise additional capital. On July 1, the corporation declared and issued a 2 for 1 stock split. On October 1, the corporation purchased on the open market 180,000 of its own shares at $35 each and retired them.
Calculate the weighted average number of common shares outstanding to be used in calculating earnings per share for 2017.
Weighted Average Outstanding Shares:
Weighted average outstanding shares refers to the number of outstanding shares given the weight of the time proportion for which they were outstanding during the year. It makes ratios such as earnings-per-share more intuitive to understand.
Answer and Explanation:
Weighted-average number of outstanding shares:
Jan 1, 2017: Beginning common shares outstanding: 300,000 shares (outstanding for 12 months)
Mar 1, 2017: New shares issued to raise capital: 45,000 shares (outstanding for 10 months)
July 1, 2017: Company declared 2 for 1 stock split
Oct 1, 2017: Reacquired and retired 180,000 shares (not outstanding for 3 months)
So, weighted average outstanding shares = ( (300,000 * 12/12) + (45,000 * 10/12) ) * 2 - (180,000 * 3/12)
= 675,000 - 45,000 = 630,000 shares
When a company declares a stock split of 2 for 1, the outstanding number of shares as on that date are split into 2 each.
So, the outstanding number of shares as on that date are multiplied by 2.
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from Introduction to Business: Homework Help ResourceChapter 24 / Lesson 14