# How to calculate weighted average shares (diluted)?



## gt88 (20 November 2010)

How is the weighted average number of ordinary shares used as the  
denominator in calculating diluted earnings per share determined? What is the formula?

Thanks


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## pixel (20 November 2010)

gt88 said:


> How is the weighted average number of ordinary shares used as the
> denominator in calculating diluted earnings per share determined? What is the formula?
> 
> Thanks




The duration (number of days), for which a particular number of shares had been issued, is used as the weighting factor; the sum of all weighted multiples is then divided by the number of days in the year (366 or 365, depending on leapyear or not).

Simple Example: Let's say for the first 150 days, 100M shares had been on issue; that number had then increased to 140M, but 100 days later, 10M were bought back.
Calculation: 
150 days times 100M = 15,000M
100 days times 140M = 14,000M
115 days times 130M = 14,950M

Summed up = 43,950M, divide by 365 days = weighted average 120,410,950 shares.

That assumes that the profit and loss had been calculated as a single sum over the full year. In cases, where a company has to issue half-yearly or quarterly P/L accounts, the averaging may have to be done in 2 or 4 parts, with the reduction (division) changed accordingly from 365 to 182 or 91 days.


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## jalicia18 (22 November 2010)

You mean the weighted average of outstanding shares?
How is it calculated? 

The amount of shares outstanding in a company will often change due to a company issuing new shares, repurchasing and retiring existing shares, and other financial instruments such as employee options being converted into shares.

The weighted average of outstanding shares is a calculation that incorporates any changes in the amount of outstanding shares over a reporting period. It is an important number, as it is used to calculate key financial measures such as earnings per share (EPS) for the time period.

Let's look at an example:
Say a company has 100,000 shares outstanding at the start of the year. Halfway through the year, it issues an additional 100,000 shares, so the total amount of shares outstanding increases to 200,000. If at the end of the year the company reports earnings of $200,000, which amount of shares should be used to calculate EPS: 100,000 or 200,000? If the 200,000 shares were used, the EPS would be $1, and if 100,000 shares were used, the EPS would be $2 - this is quite a large range!

This potentially large range is the reason why a weighted average is used, as it ensures that financial calculations will be as accurate as possible in the event the amount of a company's shares changes over time. The weighted average number of shares is calculated by taking the number of outstanding shares and multiplying the portion of the reporting period those shares covered, doing this for each portion and, finally, summing the total. The weighted average number of outstanding shares in our example would be 150,000 shares.

The earnings per share calculation for the year would then be calculated as earnings divided by the weighted average number of shares ($200,000/150,000), which is equal to $1.33 per share.


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## dhukka (22 November 2010)

jalicia18 said:


> You mean the weighted average of outstanding shares?
> How is it calculated?
> 
> The amount of shares outstanding in a company will often change due to a company issuing new shares, repurchasing and retiring existing shares, and other financial instruments such as employee options being converted into shares.
> ...





Very informative, it's uncanny how similar to an entry on INVESTOPEDIA.com it is. It's so similar in fact it is a word for word copy. Wait a minute, you didn't just copy and paste it directly and pass it off as your own work without citing the source did you? Because that would be just.....


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