For 2009, Flamingo Products had net income \$ 1,000,000. At 1 January 2009 there were 1,000,000 outstanding. On 1 July 2009,the company issued 100,000 new shares for \$ 20 per share. The company paid \$200,000 in dividend to common stockholders. What is Flamingo's basic EPS for 2009?

Basic EPS $=\frac{Net \ Income}{No. \ of \ outstanding \ shares} = \frac{1000000}{1000000}=1$

But the answer is 0.95 with outstanding No. of shares of 1050000.

I can't suss out where this additional 50000 in outstanding shares come from.

  • 4
    $\begingroup$ At 1-1-2009there were 10,00,000 outstanding shares and on 31-12-2009(end of the financial year), there were 11,00,000 outstanding shares. So on an average there were 10.50,000 outstanding shares $(10,00,000+11,00,000)/2=10,50,000$ So basic EPS=$\frac{10,00,000}{10,50,000}=0.95238$ $\endgroup$ – Dhamnekar Winod May 1 at 12:58

Great question, this detail is often overlooked but keep in mind that the correct formula is:

EPS = Net Income/Weighted average no. of shares

So we have to consider the weight of each new issue of shares. The the additional issue period of (July 1 to Dec 31) has a weight of 6/12. I created a table in the link below to help visualize the problem. Hope it helps! :)

Eps Table Example


Vincent's answers summarizes everything. Although, why should accounting standards pose such a restriction on EPS calculation?

New shares issued are weighted with the period outstanding till the end of the fiscal year. This modification is used, instead of the outstanding shares at the last day of the year, to reflect the real capital used to generate firm's revenues. Basic weighted average shares limit the possibility of firm reporting "biased" EPS. If firm engages in a share buyback program, then EPS can be inflated providing illusional profitability to investors. On the other hand, if firm issues new capital, at the end of the period, reported EPS would shrink. The latter is not the common case, since lower EPS are not alligned with shareholder's and Manager's interests. It can still, however, provide a way to misinform investors.


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