Earnings Per Share: Basic - Lesson 3 - YouTube

So, when we talk about the weighted average number of shares outstanding, we're gonna

trade stock dividends, stock splits, stock subscriptions, delayed issuance of stocks,

all of those are gonna be traded as if they had been outstanding for the whole year.

So, we'll kinda talk that, you know, in a sense, retroactively or retrospectively, as

of the beginning of the year.

So, this is the thing called weighted average number of shares outstanding.

So, what I wanna do is talk about what does weighted average number of shares outstanding

mean?

Let's look at that, so to do that, you'll see that there is an example in your notes

for weighted average number of shares outstanding.

So, I'm gonna put here a one.

Weighted average number of common stock outstanding, that's where we're gonna do this formula.

So, on average, how many shares are outstanding?

Now, let's say, for example, on January 1st I have 100,000 shares of common stock outstanding.

And you'll see this in your notes.

On April Fools' Day, another 80,000 shares are issued.

On July 1st, a 10 percent stock dividend.

And the 10 percent stock dividend is issued.

Then on nine one, 18,000 shares of treasury stock are repurchased.

Now, what does that mean?

That means of the hundred, 18 is not outstanding for nine, 10, 11, 12, 4/12 of the year.

Right, and you're allowed to bring your fingers to the exam, you can use those.

Then, on December 31st, let's do a two four one stock split.

Now, the key here is dividends and splits are done how?

Retroactively, in other words, as if they happened at the beginning of the year.

Dividends and splits are done how?

Retroactively, as if they were done at the beginning of the year, okay.

So, how many shares do we have outstanding?

What is our weighted average?

Now, remember, weighted average is different than shares outstanding.

'Cause you may have the share outstanding, but on average, it wasn't outstanding the

whole year.

So, on average, so that's why we're trying to divide it by not shares outstanding but

the weighted average of shares outstanding.

In other words, if I have 100,000 shares outstanding on January 1st, how many do I have outstanding

the whole year, 100,000.

What's weighted average, 100,000.

But, if I had 100,000 outstanding all year, and 50,000 outstanding for half a year, the

50,000 isn't 50, it's 50,000 for half a year, it's 25,000.

Oh, because on average it's as if you had 25 all year if you had 50 for half a year.

Hm, let's try it, so, 100,000 outstanding.

That's gonna be for 12/12 which is 100,000.

Then, on 80,000 is outstanding for how much of the year?

Well, it's April Fools' Day, that means it's not outstanding for 3/12, so it's outstanding

for 9/12, which is 60,000.

That's 160,000 so far, 160,000.

Then, on July 1st, 10 percent stock dividend.

What does that mean, it means you go back and everything outstanding gets 10 percent

more.

So, you, in a sense, what you can do is you can add the 10 percent retroactive, which

is another 16,000 shares.

So, that's 16.

As if they all the way back, so you were just adding.

So, you can either take this 100 plus 10 percent is 110, 60 plus 10 percent is six, there's

your 16.

Okay, 'cause you're adding 10, you're adding six, that's 16, boom.

Now, this one's tricky, 18 of the hundred were not outstanding for what, nine, now careful,

this was not on nine 30, it was nine one, so all of nine, all of 10, all of 11, all

of 12, which means that 18,000 shares were not outstanding for 4/12 of the year.

So, 18 at 4/12 is 6,000, that's shares that are not outstanding, in other words, you would

not have to pay stock, you would not have to pay a dividend to those 'cause those shares

were not outstanding for that portion of the year.

That gives me.. 160 plus the 170, six, 170.

Then, on December 31st, stock splits are treated what, everything above you hit it.

So times two gives you 340.

So 340 represents what, the weighted average number of shares outstanding.

However, how many shares are really outstanding?

You've got, really, 100 plus 80 plus another 18, 10 percent, minus 18 times two is 360,000

shares outstanding.

This is weighted average outstanding, this is just outstanding.

So, how many shares do I have really outstanding?

I have 100 plus 80, notice I add all 80 in, why?

Because I don't care how much of the year, it's just still outstanding at the end of

the year.

But, of the 180, 18 were not outstanding, but we still have to add a 10 percent dividend

to those.

That's adding in 180, 18, 10 percent, taking out 18, you end up with 180.

And then two for one is 180 times two.

So, if you took the 180 times two is 360.

So, this is outstanding, this is weighted average outstanding.

So, why do we care?

'Cause this is the number that goes here.

How much, weighted average, 340.

So, you take net income minus preferred.

What is the rule on preferred?

If it's cumulative, take it out whether declared or not.

If it's non-cumulative, only if declared.

Then, you take that, divide it by the weighted average number of common stock outstanding.

So, let's look in our notes, it says, "Weighted average number of shares outstanding," that

is the d-d-d-denominator.

There's another example we issued on one one 500.

We issued on July 1st a hundred, we issued on 10 one another 300, so what is that?

The 500 were issued, were outstanding for the whole year.

So that's 500 times 12/12.

Then we had 100 was issued on July 1st, that's 100 at 6/12.

Then, we issued 300, and they were only outstanding 10, 11, 12, is 3/12...

Which is 75, 550, that's 625.

So, you can see that once you kinda understand the basics, it's not too bad to calculate,

okay.

It says in your notes, "The reason for prorating the shares is that they're only available

for productive use by the corp. from that point on not the entire year.

This would not be the case, however, if they're retroactive, stock dividends, stock splits,

delayed issuance of earlier consideration, or stock subscriptions.In these cases, shares

are treated as if they were always outstanding and are included the full amount for the current

year.

They're also included for earlier years that are shown in comparative purposes.

In this case, a reverse stock split, these would retroactively reduce shares."

So, in a stock reverse, what is a stock split?

Two for one, what's a reverse stock split?

One for two, goes the other way.

But, here's the key, comparative, that's an important point.

So, what it says is this, if we were to go back to the previous year, then you'd have

to go back 10 percent as well for this dividend, and still go back and do a two for one split.

'Cause you gotta compare apples to apples, not apples to oranges, otherwise you get mixed

juice.

All right, you'll see that example in the notes so that you understand and the example

I gave you is a little bit more difficult, it's a little trickier.

And that example I gave you that comes out to 340, I wanted to throw in there the dividends,

I wanted to throw in there the splits, and I wanted to throw in there, also, the treasury

stock.

'Cause that has been tested and that basically comes off of the shares that you had available.

So, what is basic or simple?

It's net income minus preferred dividends is the dollars available divided by the weighted

average number of shares outstanding.

How do you calculate that?

You look at how many were outstanding for the whole year, you weight them for part of

the year.

If there's a dividend or split, go back and hit everything, including the previous year.

If there's a stock split, go back including the previous years.

If there's treasury stock, that represents the 100,000 that was not outstanding for what

portion, and you take that out, okay?

So, that's really the basic calculation.

That's what's important to understand, especially as we're trying to start out, especially as

we're trying to understand the basics of it.

What we're gonna do in a minute is then take this basic and go to the next step, which

is a complex or diluted.

Because this talks about, okay, let's assume there is stuff that's potentially dilutive.

Let's assume there are things that are convertive.

What is that, convertible bonds, convertible preferred stock, options, rights, warrants,

all these other types of transactions and instruments.

Those are other instruments that will affect earnings per share.

We will see that in just a minute.