Financial Reporting and Analysis

shreyc8
Posts: 1
Joined: Wed Aug 05, 2015 11:34 am

Financial Reporting and Analysis

Postby shreyc8 » Sun Jan 10, 2016 1:11 pm

This query is in reference to a Practice question solved in class of Financial Reporting and Analysis. The question is as follows:
A company has 100000 outstanding shares at the beginning of the year. On 1st Apr, a bonus of 2:5 is issued. On 1st July, stock was split into 2 for 1. On 1st Nov, 40% of the shares outstanding were repurchased. How much is the weighted average number of shares to be taken for Basic EPS calculation.

The faculty solved it in the following way:

01-Jan O/S 100000 250000(100000*5/2) 500000(Split doubled the stocks) held for 10 months 416666.6667 (10/12*500000)
01-Apr Bonus 2:5 (Changes are Retrospective)
01-Jul Split 2:1 (Changes are Retrospective)
01-Nov 40% of O/S 200000(40% of 500000) 300000(500000-200000) held for 2 months 50000(2/12*300000)

Hence, weighted outstanding shares 466666.6667 (416666.6667+50000)

My Question is, shouldn't it be solved in the following manner:

01-Jan O/S 100000 140000(100000*5/2) 280000(Split doubled the stocks) held for 10 months 233333.3333 (10/12*280000)
01-Apr Bonus 2:5 (Changes are Retrospective)
01-Jul Split 2:1 (Changes are Retrospective)
01-Nov 40% of O/S 112000 (40% of 280000) 168000(280000-112000) held for 2 months 28000(2/12*168000)

Hence, weighted outstanding shares 261333.3333 (233333.3333+28000)

I tried to refer as many articles as possible and could infer that a stock bonus ratio of 2:5 should mean that 'additional' 2 shares will be provided to the shareholders for every 5 number of shares held.
I guess the faculty mentioned it as that a ratio of 2:5 will mean that 2 shares held be make a total of 5 shares/ investor.

Kindly clear the same in case of any misinterpretation.

edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: Financial Reporting and Analysis

Postby edupristine » Sat Jan 16, 2016 7:54 am

Bonus issue of 2:5 implies that for every 5 shares held, 2 shares shall be issued. Hence when shares outstanding were 1,00,000. Total Shares shall become 1,40,000 ( 1L + 100000*2/5 ) . The remaining question shall be solved in the same way.
Don’t worry it might just be an arithmetical error.


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