Hello everyone, and welcome to our lesson today. Today I'm going to discuss a simple example about the basics of calculating the earnings per share. As we know, there are two versions of the earnings per share, basic or EPS, and the diluted EPS, where we take into consideration those potential securities, that potential stock, common stock, or issues that can be issued later. Today I am going to focus on the basic calculation, basic earnings per share, with a very small light complications that we need to take into consideration when we calculate this basic earnings per share. Let's get started. On December 31st, 2020, Universal company had outstanding 400,000 shares of common stock. On February 28th, 2021, universal issued an additional 36,000 shares. Obviously as we know, whenever there are new issuance during the period, each one issuance or re-purchase need to be weighted, time weighted for whatever they were outstanding, or whatever the period that they were not outstanding. On February 28th, that's very important, two months into the year. Those additional shares, the 36,000, will be weighted obviously by 10 over 12 months. At 10 percent stock, dividend was declared and distributed on July 1st, 2021. The story of any stock distribution, stock dividends, or stock splits, meaning, what? See the mind is thinking about all the rules, the 10 percent, if I have a stock dividend, then I need to actually re-weight, re-adjust all the shares that were outstanding or were issued or were re-acquired before that time by this distribution. Not any shares after. Was there any change in number of shares after? Yes. It says on September 1st, 2021, 9,000 shares were retired. Then obviously, those on September 1st. Then I need to adjust them for 4 over 12 because it's September, October, November, December, four months that they have not been outstanding. I'm just setting the stage, we'll see that in the next slide in a minute. During 2021, 40,000 shares of eight percent cumulative preferred stock par values $10, were also outstanding. We know that in the numerator, preferred dividend is not accounted, or was not deducted when in the process of calculating that income. When I calculate in the numerator, I calculate the income available for common stockholders, then I need to deduct that preferred dividends from the net income to get to whatever is available. Let me show you exactly what I've just talked about, here is basically what I said. The net income is 900,000. Mine is 32,000. It's 80 percent times the $10 times the 40,000, $10 is the par value of each of the preferred stock. The capital that was contributed by the preferred is 400,000. They have returned on in term of dividends, eight percent, so they get 32,000. Here you go. The 400,000 shares that were outstanding was weighted, was adjusted by the stock dividend. Actually the 36,000 that were issued on February 28th was weighted by 10 month over 12, and was adjusted by the stock dividend because those two, the 400,000 shares and the 36,000 shares that were issued were both, were outstanding at the time of the stock dividend. That's why I had to adjust by the 1.10, which is the 10 percent stock dividend. Later on, I retired some shares, which is the 9,000. They were adjusted the 4 over 12 months, and that is because of they were retired on September 1st, so for the four months they were not outstanding, that's why I deducted these number of shares that were not outstanding, that were retired. Obviously, you can see that the 1.10 is not here because the stock dividend adjustment will be for whatever was outstanding, or whatever was issued or whatever was re-acquired before that stock dividend turning the previous stock dividend into the new stocks that are presented after the stock dividend was declared an issue. Finally, I take the numerator after deducting the 32,000, I divide it by the denominator and simply 1.847, this is simply the basic earnings per share. This is basic case, there is no diluted because there is no optional stocks that can be issued. That's why I do not have the diluted version of the EPS. Hopefully, that describes and illustrate the two more complications that we have with the weighting process to calculate the weighted average number of shares, and the process of the adjustment for any stuck distribution, whether it's a stock dividend or a stock split. Thank you.
