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PS 1000: Secton 7 #14

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Junior | Next Rank: 30 Posts
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PS 1000: Secton 7 #14

by envyk10 » Thu May 10, 2007 10:28 am
A corporation with 5,000,000 shares of publicly listed stock reported total earnings of $7.20 per share for the first 9 months of operation. During the final quarter the number of publicly listed shares was increased to 10,000,000 shares, and fourth quarter earnings were reported as $1.25 per share. What are the average annual earnings per share based on the number of shares at the end of the year?

(A) $1.83
(B) $2.43
(C) $4.85
(D) $8.45
(E) $9.70
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by bww » Thu May 10, 2007 9:36 pm
Is the answer C?

If so, I believe this is an example of a weighted average problem. To find a weighted average, we want to find the average of the first 3 quarters and the final quarter.

5M*$7.20=gross earnings of $36M for 9 months.

For final 3 months, the shares were increased to 10M, so an addition of 5M, NOT 10million. So, 10M*1.25=$12.5M.

36+12.5/10=4.85 (sum of weighted terms/total # of terms)

I really think the trick here is understanding that the # of shares increased to 10million, and not by 10million. That was tripping me up. That and the fact that the company didn't have 5M each quarter, it was 5M total carried over first three quarters...

Hope this is correct, or else it's all moot!
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Junior | Next Rank: 30 Posts
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by envyk10 » Fri May 11, 2007 5:06 am
Answer is C, Thanks
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