How to Adjust Dividends for EPS

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Calculating EPS
Calculating EPS (Image: Calculator image by Alhazm Salemi from Fotolia.com)

EPS means earnings per share. Calculate earnings per share by dividing the income available to shareholders by the weighted-average number of shares outstanding. Common stock cash dividends do not adjust earnings per share, but stock dividends require an adjustment. Stock dividends are when a company gives stock as a dividend instead of cash. In addition, preferred dividends can change the income available to shareholders.

Determine the number of shares outstanding at the beginning of the period. This is usually located in the stockholder's equity section of the financial statements. For example, Firm XYZ had 50,000 of common stock outstanding at the beginning of the period.

Determine the amount of stock dividends during the period. For example, during the year Firm XYZ issues a stock dividend of 0.5 shares of common stock for every share of common stock owned. Since there were 50,000 shares of common stock, the total stock dividend is 25,000 shares of common stock.

Add the number of shares outstanding at the beginning of the period to the number of shares created in the stock dividend. The stock dividend is treated retroactively, meaning treat the stock dividend as if it occurred at the beginning of the year, not in the middle of the year. In the example, the 50,000 shares at the beginning of the period plus 25,000 shares from the dividends from the middle of the period equals 75,000 shares of common stock. If no other stock transactions, such as a split, purchasing treasury stock, or issuing more stock occurred during the period, then the weighted average number of shares outstanding during the period equals 75,000 shares of common stock for Firm XYZ.

Subtract any preferred dividends from net income to reach the income available to shareholders. If a company does not have preferred stock, there are no preferred dividends.

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