5: Earnings per share

Question 1

What is EPS widely regarded as?

Answer 1

The most important indicator of a companies performance.

Question 2

IAS 33 Earnings per Share achieves comparability by: doing what 3 things?

Answer 2

• Defining earnings
• Prescribing methods for determining the number of shares to be included in the calculation of EPS
• Requiring standard presentation and disclosures.

Question 3

What is the basic EPS calculation?

Answer 3

Earnings ÷ Shares

Question 4

How should the EPS value be presented?

Answer 4

As cents per share to 1dp

Question 5

How do we calculate earnings?

Answer 5

Group profit after tax
Less: non-controlling interests
Less: Irredeemable preference share dividends.

Question 6

What are two alternative names for a bonus issue?

Answer 6

• Capitalisation issue

- Scrip issue

Question 7

What does a bonus issue mean?

Answer 7

• Does not provide additional resources to the issuer

- The shareholder owns the same proportion of the business before and after the issue

Question 8

How do you treat a bonus issue in the calculation of the EPS?

Answer 8

As if it was there from the start.

Question 9

What do we do with previous years comparative figures for EPS when there is a bonus issue?

Answer 9

We restate to allow for the proportional increase in capital.

Question 10

What are the four steps for calculating the EPS when there has been a rights issue?

Answer 10

1 - Calculate TERP
2 - Calculate the bonus fraction
3 - Weighted average number of shares
4 - EPS

Question 11

How do you calculate the bonus fraction?

Answer 11

Market price before issue ÷ Theoretical ex rights price

Answer 12

• The conversion terms for convertible bonds/convertible loans etc.
• The exercise price for options and the subscription price for warrants.

Question 13

What is the calculation for DEPS?

Answer 13

(Earnings +Notional extra earnings) ÷ (Number of shares +notional extra shares)

Question 14

What are the three results of the convertible bonds/preference shares being converted:

Answer 14

• The interest/dividend would be saved therefore earnings would be higher
• The additional earnings would be subject to tax
• The number of shares would increase.

Question 15

What does the holder of an option or warrant have the right to do?

Answer 15

To buy shares at some time in the future at a predetermined price.

Question 16

The total number of shares issued on the exercise of the option or warrant is split into two: What are these?

Answer 16

-The number of shares that would have been issued if the cash received had been used to buy shares at fair value (using the average price of the shares during the period) the remainder, which are treated like a bonus issue

Question 17

The total number of shares issued on the exercise of the option or warrant is split into two: What are these?

Answer 17

• The number of shares that would have been issued if the cash received had been used to buy shares at fair value (using the average price of the shares during the period)
• The remainder, which are treated like a bonus issue

Question 18

What is a formula for DEPS with an option?

Answer 18

No. of options ×((Fair value – exercise price) ÷ Fair value)

Question 19

How do you calculate the P/E ratio?

Answer 19

Market value of share ÷ EPS

Question 20

DEPS is important for the following reasons:

Answer 20

• It shows what the current year’s EPS would be if all the dilutive potential ordinary shares in issue had been converted
• It can be used to assess trends in past performance
• In theory, it serves as a warning to equity shareholders that the return on their investment may fall in future periods.