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Stock dividend distinguished from a stock split

#1

a. Explain how dividends or dividend requirements on any class of preferred stock that may be outstanding affect the computation of EPS.

b.One of the technical procedures applicable in EPS computations is the "treasury stock method." Briefly describe the circumstances under which it might be appropriate to apply the treasury stock method.
c. Convertible debentures are considered potentially dilutive common shares. Explain how convertible debentures are handled for purposes of EPS computations.

#2

a.What is a stock dividend? How is a stock dividend distinguished from a stock split?
b.For what reason does a corporation usually declare a stock dividend? A stock split?
c. Discuss the amount, if any, of retained earnings to be capitalized in connection with a stock dividend.

Solution Preview

#1.

a. Explain how dividends or dividend requirements on any class of preferred stock that may be outstanding affect the computation of EPS.

When a capital structure includes preferred stock, dividends on preferred stock should be deducted from income before extraordinary or other below-the-line items and from net income before calculating the basic EPS. If the preferred stock is noncumulative, only the declared dividends need be deducted, but if it is cumulative, both declared and undeclared dividends should be deducted.

b. One of the technical procedures applicable in EPS computations is the "treasury stock method." Briefly describe the circumstances under which it might be appropriate to apply the treasury stock method.

First we need to understand that all computations of diluted EPS are made as if the exercise or conversion took place at the beginning of the company's fiscal year or at the issue date of the stock option or convertible security, whichever comes later.
If the exercise price of options, warrants, or other rights i. e., the price for which ...

Solution Summary

This is an explination of a stock dividend and how it is distinguished from a stock split, in addition it explains why a corporation usually declare a stock dividend or a stock split and how convertible debentures are handled for purposes of EPS computations.

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