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When computing fully diluted EPS, it is a good idea to adjust shares for stock splits and stock dividends before making any other adjustments. Be careful when adjusting shares outstanding, and share transactions. Such adjustments should be applied as of the beginning of the accounting year, even if the splits or dividends occur much later. For example, if a company had 1 million shares outstanding at the beginning of the year (January 1st) and repurchased 50,000 shares on March 31st, a 2:1 split that became effective on May 15th, will be applied to both the numbers given above. One million shares will be increased to 2 million (= 2 x 1 million) and 50,000 shares will be increased to 100,000 (= 2 x 50,000). If 200,000 new shares are issued on, say, June 1st, they should not be adjusted as they occur in the post-split environment. Once these adjustments have been made, weight the number of shares outstanding by the appropriate relative period. Stock split and stock dividend adjustments are quite straight forward but due to a seemingly lack of time on the exam, it is a good idea to be very clear about the process before heading to the exam. Questions will undoubtedly try to steer you toward one of the three incorrect answers!
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