# Impact of Stock Dividends and Stock Splits on Earnings Per Share (EPS)

Stock dividends are payment of additional shares of stock to common shareholders. For example, assume a company announces a 5% stock dividend to all shareholders of record.  For each 100 shares held, shareholders receive another 5 shares.

In case of stock splits, the firm increases the number of shares outstanding and reduces the price of each share. For example, assume that a company announces a 3-for-2 stock split.  For each 100 shares held, shareholders receive another 50 shares.

Stock splits and stock dividends are economically the same. The number of shares outstanding increases and the price of each share drops.  The value of the firm does not change. A 3-for-2 stock split is the same as a 50% stock dividend.  For each 100 shares held, shareholders receive another 50 shares.

In the calculation of EPS, the Total Weighted Average Common Shares will be affected by stock dividends and stock splits. Let’s take an example to understand this.

Example

A company has net income of $1 million. It paid dividends of$100,000 to its preferred shareholders and also paid dividends of \$200,000 to its common shareholders.

The company had 12,000 shares of common stock outstanding on January 1.  On March 1, it issued 2700 shares; on July 1, it declared a 20% stock dividend; and on December 1, it acquired 480 shares as treasury stock. The weighted average number of common shares is calculated below:

Step 1: Adjust the pre-dividend number of shares to post-dividend number of shares.

This will be done by multiplying the number of shares prior to declaring dividends by 1.2 (20% dividend).

January 1        12,000*1.2 = 14,400

July 1              2700*1.2 = 3,240

Step 2: Calculate the Total Weighted Average Common Shares

Step 3: Calculate Basic EPS

The Basic EPS of the company will be:

### You may find these interesting

Defining Stock Warrants
Warrants are a good alternative investment vehicle for investors.  Investors can make it a part of t...
Types of Stock Warrants
**Call Warrants vs Warrant** A warrant is issued by a company for the purpose of raising capital. W...

#### Related Quizzes

Understanding Income Statements
Accelerate your finance career with cutting-edge data skills.
Join Finance Train Premium for unlimited access to a growing library of ebooks, projects and code examples covering financial modeling, data analysis, data science, machine learning, algorithmic trading strategies, and more applied to real-world finance scenarios.
I WANT TO JOIN
JOIN 30,000 DATA PROFESSIONALS

## Free Guides - Getting Started with R and Python

Enter your name and email address below and we will email you the guides for R programming and Python.

# Data Science in Finance: 9-Book Bundle

Master R and Python for financial data science with our comprehensive bundle of 9 ebooks.

## What's Included:

• Getting Started with R
• R Programming for Data Science
• Data Visualization with R
• Financial Time Series Analysis with R
• Quantitative Trading Strategies with R
• Derivatives with R
• Credit Risk Modelling With R
• Python for Data Science
• Machine Learning in Finance using Python

Each book comes with PDFs, detailed explanations, step-by-step instructions, data files, and complete downloadable R code for all examples.