The following data were reported by a corporation:
Authorized shares: 39,000 Issued shares: 34,000 Treasury shares: 13,000 The number of outstanding shares is:
A. 39,000 B. 21,000 C. 26,000 D. 52,000 E. 34,000
The Correct Answer and Explanation is:
To determine the number of outstanding shares, we first need to understand the definitions of authorized shares, issued shares, and treasury shares:
- Authorized Shares: This is the maximum number of shares that a corporation is allowed to issue, as specified in its corporate charter. In this case, the authorized shares are 39,000. However, not all authorized shares are necessarily issued.
- Issued Shares: These are the shares that have actually been sold to shareholders. The corporation in question has issued 34,000 shares.
- Treasury Shares: These are shares that were previously issued but have been repurchased by the corporation and are held in the company’s treasury. They are not considered when calculating outstanding shares. Here, the treasury shares total 13,000.
To calculate the number of outstanding shares, we use the following formula:
[
\text{Outstanding Shares} = \text{Issued Shares} – \text{Treasury Shares}
]
Plugging in the values from the data provided:
[
\text{Outstanding Shares} = 34,000 \, (\text{Issued Shares}) – 13,000 \, (\text{Treasury Shares}) = 21,000
]
Therefore, the number of outstanding shares is 21,000, which corresponds to option B.
Explanation of Importance: Understanding the number of outstanding shares is crucial for various financial calculations, including earnings per share (EPS) and market capitalization. EPS is calculated using the formula:
[
\text{EPS} = \frac{\text{Net Income}}{\text{Outstanding Shares}}
]
If a corporation repurchases its shares, the number of outstanding shares decreases, which can lead to a higher EPS, making the company appear more profitable on a per-share basis. This practice can influence investor perception and the stock price. Treasury shares do not confer voting rights or dividends, thus having a direct impact on shareholder equity. In corporate finance, maintaining an appropriate balance of issued and outstanding shares is key for maximizing shareholder value while maintaining sufficient capital for growth and operations.