Question

Tim had net income of $500,000 for both last year and the current year. The shares outstanding for the prior year was 100,000 shares for the whole year. On December 1 of the current year, he declared a two-for-one stock split. There were no other stock transactions in either year. Compute the EPS that would be shown on a comparative income statement for Years 1 and 2 (In other words, what are EPS for Years 1 and 2 on a split-adjusted basis?)

Please show and explain all work

Typed answers only please

Answer 1

The EPS for year 1 and 2 are calculated as follow

Year 1

​EPS = (Net Income – Preferred Dividends) / End of period Shares Outstanding

= ( $500000 - 0)/100000

= 5

Year 2

A stock split is when a company divides the existing shares of its stock into multiple new shares to boost the stock's liquidity.The most common split ratios are 2-for-1 or 3-for-1, which means that the stockholder will have two or three shares, respectively, for every share held earlier.After a 2-for-1 stock split, an individual investor who had owned 1,000 shares might be elated at the prospect of suddenly being the owner of 2,000 shares.so in this question the ouststanding stock is 100000 after stock split it gets 200000 shares ans the new EPS will be

​EPS = (Net Income – Preferred Dividends) / End of period Shares Outstanding

=( $ 500000- 0) /200000

= 2.5