Chapter 18 Earnings Per Share

Question 1

Earnings per Share

Answer 1

EPS = Earnings/ Weighted average no. of equity shares outstanding during the period

Earnings = Consolidated profit after income taxes, non controlling interests, preference dividends.

Question 2

Changes in equity share capital

Answer 2

1. Issue at full market price
   Increase in earnings therefore use weighted average number of shares.
2. Bonus issue
   No effect on earnings therefore apply effect retrospectively including restatement of comparatives.
3. Rights issue
   Some effect on earnings therefore treat as issue at full market price followed by bonus issue.

Question 3

Diluted earnings per share

Answer 3

Diluted EPS shows how basic EPS would change if potential ordinary shares become ordinary shares.

When the potential shares are issued, the impact on basic EPS will be two fold:
The number of shares will increase
There may be a change in earnings e.g. Lower interest charges.

Convertible debt:
Earnings $
Basic earnings X
Add back: loan stock interest net of income tax saved X
—
X
—
No. of shares No
Basic weighted average X
Add: additional shares on conversion (using terms giving
maximum dilution available after year end) X
—
Diluted number X
—

Question 4

Share options or warrants

Answer 4

Potential shares on the exercise of options or warrants are split as follows:

1. Shares that would have been issued if the cash received had been used to buy shares at average market price for the period.
2. The remaining shares are treated as having been issued for no consideration.

Proforma page 254

Only the shares deemed to have been issued for no consideration which are added to the number of shares in issue when calculating diluted EPS (shares issued at full market price have no dilutive effect).

Question 5

Diluted earnings per share

Answer 5

Diluted EPS shows how basic EPS would change if potential ordinary shares become ordinary shares.

When the potential shares are issued, the impact on basic EPS will be two fold:
The number of shares will increase
There may be a change in earnings e.g. Lower interest charges.

Convertible debt:
Earnings $
Basic earnings X
Add back: loan stock interest net of income tax saved X
—
X
—
No. of shares No
Basic weighted average X
Add: additional shares on conversion (using terms giving
maximum dilution available after year end) X
—
Diluted number X
—

Question 6

Share options or warrants

Answer 6

Potential shares on the exercise of options or warrants are split as follows:

1. Shares that would have been issued if the cash received had been used to buy shares at average market price for the period.
2. The remaining shares are treated as having been issued for no consideration.

Proforma page 254

Only the shares deemed to have been issued for no consideration which are added to the number of shares in issue when calculating diluted EPS (shares issued at full market price have no dilutive effect).