Common stock, $1 par value Shares outstanding, 1/1/2021 60,000 2-for-1 stock split, 4/1/2021 Shares issued, 7/1/2021 30,000 Preferred stock, $10 par value, 6% cumulative Shares outstanding, 1/1/2021 12,000 How many shares should Tb use to calculate 2021 basic earnings per share?

120,000 shares

Explanation:

We will use weighted average numbers of outstanding shares.

Outstanding numbers of shares are those share which are issued in the market by the company and still being traded in the market. Treasury stock is excluded from the total issued share to calculate the total outstanding numbers of share.

Stock split increase the numbers of shares with a specific given ratio but the common equity value remains same that's why the par value of the share decreases with respective ratio.

4/1/2021

Shares after stock split

Outstanding numbers of shares = 60,000 shares x 2 / 1 = 120,000

7/1/2021

Shares after issuance

Outstanding numbers of shares = 120,000 shares + 30,000 shares = 150,000 shares

Now calculate the weighted average numbers of shares

1/1/2021-3/31/2021 60,000 x 3/12 = 15,000

4/1/2021-6/30/2021 120,000 x 3/12 = 30,000

7/1/2021-12/31/2021 150,000 x 6/12 = 75,000

Weighted average outstanding shares 120,000

75,000 shares

Explanation:

earnings per share (EPS) = (net income - preferred dividends) / weighted average shares outstanding

net income = ? preferred dividends = $10 x 6% x 12,000 = $7,200 weighted average shares outstanding = [60,000 + (120,000 x 9/12) ] / 2 = (60,000 + 90,000) / 2 = 75,000 shares

Since the shares split to 120,000 on April, their relative weight at the end of the year is 9/12 x 120,000 = 90,000. That is why the average shares = (beginning number of outstanding shares + ending number of outstanding shares) / 2 = 75,000