• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
Finance Train

Finance Train

High Quality tutorials for finance, risk, data science

  • Home
  • Data Science
  • CFA® Exam
  • PRM Exam
  • Tutorials
  • Careers
  • Products
  • Login

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

CFA® Exam Level 1

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

December 1    -480 (No adjustment)

Step 2: Calculate the Total Weighted Average Common Shares

beps1

Step 3: Calculate Basic EPS

The Basic EPS of the company will be:

beps2

Join Our Facebook Group - Finance, Risk and Data Science

Posts You May Like

How to Improve your Financial Health

CFA® Exam Overview and Guidelines (Updated for 2021)

Changing Themes (Look and Feel) in ggplot2 in R

Coordinates in ggplot2 in R

Facets for ggplot2 Charts in R (Faceting Layer)

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Primary Sidebar

Latest Tutorials

    • Data Visualization with R
    • Derivatives with R
    • Machine Learning in Finance Using Python
    • Credit Risk Modelling in R
    • Quantitative Trading Strategies in R
    • Financial Time Series Analysis in R
    • VaR Mapping
    • Option Valuation
    • Financial Reporting Standards
    • Fraud
Facebook Group

Membership

Unlock full access to Finance Train and see the entire library of member-only content and resources.

Subscribe

Footer

Recent Posts

  • How to Improve your Financial Health
  • CFA® Exam Overview and Guidelines (Updated for 2021)
  • Changing Themes (Look and Feel) in ggplot2 in R
  • Coordinates in ggplot2 in R
  • Facets for ggplot2 Charts in R (Faceting Layer)

Products

  • Level I Authority for CFA® Exam
  • CFA Level I Practice Questions
  • CFA Level I Mock Exam
  • Level II Question Bank for CFA® Exam
  • PRM Exam 1 Practice Question Bank
  • All Products

Quick Links

  • Privacy Policy
  • Contact Us

CFA Institute does not endorse, promote or warrant the accuracy or quality of Finance Train. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Copyright © 2021 Finance Train. All rights reserved.

  • About Us
  • Privacy Policy
  • Contact Us